Does the ECB Use Liquidity as a Weapon?

 Interest rates and money markets are moving up in the eurozone.  Yet, the ECB has continued to contract its balance sheet which has sporadically forced the EONIA above the ECB refi rate, which would indicate the ECB is contracting liquidity at the very time its member countries need liquidity.  Given the current problems with Greece, this is like, as David Beckworth has written, throwing gasoline on the fire.

I have previously questioned whether the ECB has used liquidity to force Portugal into a bailout and definitely used its purse strings to push Ireland into a bailout which nationalized Irish bank debt protecting core eurozone banks as senior bond holders. 

As Michal Darda elaborates in Beckworth's post, contracting the ECB balance sheet, contracting liquidity, and raising interest rates may be the right monetary policy for Germany and France, but it is the worst thing that the ECB could do for Greece, Portugal, Ireland, Spain, and Italy.  It is one thing to have banks in Ireland who threw risk management out the window and decades of political and private corruption in Greece and it is another to defend austerity to the destruction of the peripheral member countries by driving Portugal to bailout, Greece to the brink of default, and place cross hairs on Spain and Italy.  Just as inappropriate deficit reduction and tightened monetary policy in the United States in 1936-37 led to a depression within a depression, the ECB is following a confidence debasing path in the monetary base of its currency, which may very well result in an international loss of confidence in the euro and the need of the ECB to refinance itself.  But it is intent on making those outraged Greek "peasants" accept austerity and protect the core eurozone financial system --- at least for awhile.

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