Mario Draghi’s policy tools are being blunted in Berlin.
The European Central Bank president has stopped short of large-scale sovereign-bond purchases as efforts to mollify Germany’s political elite do little to silence criticism of his ever-more expansionary measures. Support for anti-euro groups such as Alternative for Germany has risen and the ECB’s latest plan to buy assets sparked an outcry within all major parties.
“German public opinion matters an awful lot,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “Draghi wants the ECB to be a central bank like any other, one that can go and buy government debt. But he’s perfectly aware of Germany’s opposition, and the storm now is a clear signal that it’ll be much more difficult.”
Draghi, who will speak at the Brookings Institution in Washington today, may be pressured at this week’s International Monetary Fund meetings in the city to take further measures to revive the 18-nation currency bloc’s recovery. That won’t be easy in the face of a German aversion to quantitative easing that is rooted in the 1920s, when money-printing laid the foundation for a society that still fears rising prices more than deflation.
The debate over sovereign-debt purchases will be raised again on Oct. 14 when the European Union’s highest court hears arguments about the ECB’s still-unused OMT program. Germany’s Federal Constitutional Court has already expressed doubts about the legality of the two-year-old pledge to buy bonds of stressed countries after a challenge by a German lawmaker and a group of academics.
The hyperinflation of the 1920s, when the government printed paper currency to finance World War I reparations, remains embedded in the national consciousness. By the end of 1923, prices were doubling every 49 hours and one U.S. dollar was worth more than a trillion German marks, prompting people to bring their money to shops in a wheelbarrow. It also paved the way for the rise of Adolf Hitler.
Draghi has shown his awareness of German concerns, explaining his policies to lawmakers in 2012 and addressing the nation in a rare television interview in 2013. He is also in regular contact with Chancellor Angela Merkel and reached out to her before announcing the latest medley of stimulus measures.
While he stayed away from sovereign-debt purchases this time, preferring asset-backed securities and covered bonds, the plan still triggered a flood of complaints.
Hans-Werner Sinn, president of Germany’s Ifo economic institute, said the plan isn’t covered by the central bank’s mandate and urged the government to take action against it. Lawmakers from Merkel’s governing coalition expressed concern that the ECB will load up on junk assets, while representatives from opposition parties highlighted the risk to German wallets.
German Finance Minister Wolfgang Schaeuble said that while he understands the ECB has a difficult mandate, it “should always take into account the issue of wrong incentives or, to put it differently, lame excuses.”
The ECB is continuing “its pernicious policy” of transferring risks from European banks to German taxpayers, said Jan Bollinger, a member of Alternative for Germany. The party emerged last year on a platform of opposing the single European currency and bailouts to indebted euro-area member states, and has won seats in three state parliaments in the past two months.
Bundesbank President Jens Weidmann opposed both the OMT program and the latest purchase plan. In an interview published by the Wall Street Journal this week, he said that “what I cannot support or accept are measures that see the central bank straying into economic policy or fiscal policy.”
His predecessor Axel Weber and Germany’s Juergen Stark, a chief economist of the ECB, resigned over sovereign-bond purchases made under the now-defunct Securities Markets Program.
A business group allied with Merkel’s Christian Democratic Union balked at giving Draghi an award for stemming the euro area’s debt crisis. After Capital magazine reported in July that the prize was withdrawn, Kurt Lauk, head of the CDU’s Economic Council said while Draghi was a candidate to receive the honor, lauding him before the crisis is over would be premature. The ECB declined to comment on the award or the report at the time.
Draghi said at his monthly press conference on Oct. 2 that asset purchases will be prudent, and that action is needed because a prolonged period of low inflation is harmful to the economy. Euro-area consumer prices climbed 0.3 percent last month from a year earlier and the ECB predicts inflation won’t return to its goal of just under 2 percent before at least 2016.
The critics of the policy “are getting their logic upside down,” said Holger Schmieding, chief economist at Berenberg Bank in London. “The opposite of what they claim is correct: by pursuing an adequate policy as required by its mandate, the ECB is helping to reduce risks for all taxpayers in the euro zone, including the German taxpayers.”
Dismal data may yet force Draghi’s hand, with economists from Deutsche Bank AG to M. M. Warburg & Co. predicting he’ll eventually enact QE. The IMF this week cut its economic-growth forecasts for the euro area, including Germany. In contrast, it highlighted the U.S. and the U.K., which both started such programs in the global financial crisis more than five years ago, as bright spots.
“In Germany, government bonds are the work of the devil, but from a taxpayer’s perspective I have to wonder if it’s better to take a credit risk nobody can grasp by cherry-picking assets,” said Stefan Schneider, international economist at Deutsche Bank in Frankfurt. “If one of the pills needs to be swallowed, then government debt doesn’t look as bad as ABS.”
Even Germany is suddenly staring at a renewed risk of recession. After the economy contracted in the second quarter, data for the three months through September have largely come in below analysts’ estimates. Factory orders, industrial output and exports plunged in August by the most since January 2009.
Inflation in the country has drifted lower since the middle of 2013 and hasn’t topped 2 percent in more than two years. Yet nine in 10 people expected the cost of living to increase, and four in 10 said it will do so significantly, in a GfK survey for Spiegel Online published in February. That vastly outweighs the 1.4 percent of the 1,008 people polled who predicted a decline.
“Sovereign QE would probably be a very controversial move,” said Marco Valli, chief euro-area economist at UniCredit Global Research in Milan. “The ECB is going to resist going down that route as much as possible.”