Merkel Urged to Pass Message to Draghi: End Record-Low Rates

Angela Merkel and Mario Draghi

Angela Merkel and Mario Draghi.

Photographer: Michele Tantussi/Bloomberg
  • German banks, Bundesbank keep up drumbeat of ECB criticism
  • `We're waiting' for Draghi to act, Merkel party lawmaker says

Lawmakers allied with German Chancellor Angela Merkel say it’s time for the European Central Bank to outline an exit strategy from record-low interest rates and she should tell Mario Draghi so.

As Merkel hosted the ECB president for a private meeting in Berlin on Friday, German banks, her party bloc and Bundesbank head Jens Weidmann are pushing for Draghi to explain how he’ll get out of quantitative easing. Designed to counter “economic malaise” as Europe’s debt crisis recedes, the policy is seen by critics as hurting German savers and retail investors, who tend to prefer low-risk investments.

“I trust that the chancellor will clearly address the concerns related to the ECB’s policy” when she hosts Draghi at the chancellery, said Alexander Radwan, a member of the German parliament’s finance committee and lawmaker from Merkel’s party bloc. Merkel should help to ensure “that Europe recognizes the limits of central-bank policy,” he said.

While ECB policy is out of Merkel’s hands, low borrowing costs for the 19 euro-area nations are adding to dissatisfaction among members of her party, whose loyalty is already strained by euro-area bailouts and a record influx of refugees to Germany. Draghi argues that the central bank’s 1.5 trillion-euro ($1.6 trillion) bond-buying program is needed to try to revive inflation and he’s pledged to do more if prices don’t pick up.

Merkel and Draghi held what Steffen Seibert, Merkel’s chief spokesman, described as an “informal and confidential” meeting. The chancellor’s office declined to comment on what they discussed.

That reticence hasn’t stopped Wolfgang Schaeuble, Merkel’s finance minister since 2009 and one of her key allies, from publicly prodding the ECB and portraying its policies as a threat to financial stability. Monetary policy has fueled a tendency toward “exaggeration in financial markets,” with liquidity spurring nervousness “that’s materializing in China now,” Schaeuble said in Brussels on Thursday.

“I will not deny that the low interest rates are worrying us,” Antje Tillmann, the finance-policy spokeswoman of Merkel’s party bloc, said in an interview. Germany can manage the low-rate environment only in the short term “and I hope therefore that this will change. I believe Mr. Draghi knows that we’re waiting for this.”

Bundesbank Warns

Weidmann warned on Tuesday in Paris that low rates over an extended period squeeze bank profits and risk fueling financial bubbles. Supervisors will keep a close eye on banks whose earnings are plummeting in the low-rate environment, Felix Hufeld, president of Germany’s BaFin financial services watchdog, said the same day in Frankfurt.

“The fact that interest rates have been extremely low for years is increasingly bothering banks in Germany,” Hufeld said. Morgan Stanley economists including Elga Bartsch said they don’t rule out more ECB easing this year, possibly in June or July.

Support for Merkel’s Christian Democrat-led bloc declined 2 percentage points compared with two weeks ago to 37 percent amid growing public concern that refugees are overwhelming Germany, according to an Infratest Dimap poll for ARD television. The Social Democrats, Merkel’s coalition partner, and Alternative for Germany, which wants to shut Germany’s border and doesn’t have seats in parliament, gained 1 percentage point each to 25 percent and 10 percent, respectively.

While signs have increased that ECB stimulus is bolstering the euro area’s recovery, many in Germany’s establishment are convinced the central bank has become a tool of politicians who depend on cheap debt to avoid economic overhauls.

‘Political Trap’

“I see no rate increases in the euro zone in the medium term because unlike the Fed, the ECB is caught in a political trap,” said Carsten Linnemann, head of the small-business caucus in Merkel’s parliamentary group. “Debt in the euro zone keeps rising, despite dramatically low interest rates.”

German banks are especially hard-hit because net interest income is by far the largest source of revenue, Michael Kemmer, general manager of the Association of German Banks, told reporters on Wednesday in Berlin.

“By opening the monetary floodgates, the ECB has taken pressure off disciplining banks and disciplining politicians to advance reforms,” Kemmer said. “That’s the downside of the low interest-rate policy.”

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