German `Sideshow' Sniping at ECB Shows Euro Area in a Rut

  • Finance minister feeds resentment in Germany over ECB policy
  • ECB sees political willingness to reform lagging in Europe

German discontent toward the European Central Bank is rising -- and the feeling seems to be mutual.

Days before Group of 20 and International Monetary Fund meetings in Washington, German Finance Minister Wolfgang Schaeuble has suggested that ECB President Mario Draghi shares the blame for the rise of populist parties. With mainstream representatives piling on the opprobrium, ECB officials -- including Germany’s own central-bank head -- are showing exasperation that they’re under attack from politicians who have failed to upgrade the euro area’s economic foundations.

While a German government spokesman said on Monday that highlighting the dangers of ECB policy is “legitimate,” others are warning that it’s symptomatic of a dangerous lack of euro-area consensus. From discord over refugees to a standstill on economic policy management, German voters and the ECB are frustrated over what they see as the broken promises of others. 

“Germany doesn’t differ from any other European country in that there’s scapegoating going on,” said Marcel Fratzscher, president of the German Institute for Economic Research and a former ECB official. The debate “is very harmful for the credibility of the ECB as the public perception is that they’re doing something hugely damaging.” 

Cash Debate

Germany’s longstanding ire over low -- and negative -- interest rates that are seen as expropriating savers has been fed by repeated expansions of ECB stimulus. In addition, the suggestion that the ECB might phase out the 500-euro ($572) note has stoked suspicions in cash-oriented Germany that the central bank wants to abolish paper money to cut rates even further.

Public theorizing on another remedy known as “helicopter money” -- direct central-bank financing of stimulus -- has helped push the discord among parts of the nation’s population toward hysteria. Draghi called it a “very interesting concept” last month, though he and his colleagues say they haven’t discussed the move as a policy option.

“The longer the low-rate phase goes on, the more serious the effects on savers, pensions and pension liabilities of companies will be,” said Antje Tillmann, financial-policy spokeswoman for the Christian Democratic Union, the party of Chancellor Angela Merkel. “The ECB has to constantly explain their policies publicly. And what’s even more important, they have to work on an exit scenario.”

Populist Party

The high-profile discussions have led politicians to pressure the ECB even while paying lip service to its independence. The latest example came on Friday in Kronberg, Germany, where Schaeuble said he’d told Draghi that 50 percent of the success of the anti-immigration Alternative for Germany party can be attributed to his monetary policy. An ECB spokesman declined to comment.

“There is in this country, and not just here but in Europe and internationally, a discussion about monetary policy and the effects of monetary policy,” finance ministry spokesman Martin Jaeger said on Monday. “It’s a legitimate discussion that has to take place. But that’s certainly not to be confused with an attempt to exercise any direct influence.”

ECB Governing Council member Jens Weidmann, the president of Germany’s Bundesbank, commented on the topic in an interview with the Financial Times published on Tuesday.

‘Not Unusual’

“It’s not unusual for politicians to have opinions on monetary policy, but we are independent,” he said. “The ECB has to deliver on its price stability mandate and thus an expansionary monetary policy stance is appropriate at this juncture regardless of different views about specific measures.”

Schaeuble and Draghi will probably hold talks in Washington this week, Jaeger said. G-20 policy makers will meet from April 14-15, with finance ministers and central-bank governors from 188 countries gathering from April 15-17 for the spring meetings of the IMF and World Bank to discuss how to revive weak global growth.

The ECB’s position is that loose monetary policy is needed if the institution is to hit its inflation goal and reinvigorate the currency bloc’s economy. Moreover, if politicians did more, the central bank could do less.

Monetary Sideshow

“Please give us a political system, a fiscal system, an institutional system,” that avoids “all of these issues coming to the desk of the ECB,” Executive Board member Benoit Coeure said at a conference in Frankfurt on April 7. “All the discussions we’re having on monetary policy, or zero interest rates, it’s a sideshow, it’s really a sideshow.”

His colleague Peter Praet said at the same conference that carping from Germany is “sometimes difficult to swallow.”

The rising tension reflects the strains in an economic and monetary union that has yet to finish rebuilding itself after a financial crisis and double-dip recession. That includes completing the euro area’s banking clean up, implementing strengthened budget rules agreed during the crisis, and finishing the repair work in Greece and other states that were at the center of the meltdown.

Goethe Jibe

The slow pace is often laid at the door of Europe’s biggest economy. Criticism is now focused on Germany’s refusal to agree to debt relief for Greece. In the past, reluctance to delegate more crisis-fighting powers to the euro-area level has drawn anger.

Schaeuble’s budget surpluses are also raising concern at a time when calls for more fiscal stimulus are mounting. In a thinly-veiled jibe at an event in Frankfurt last week, IMF Managing Director Christine Lagarde quoted German literary giant Goethe: “The message well I hear, my faith alone is weak.”

That leaves all sides frozen in common discontent, according to Lars Feld, a professor of economics at the University of Freiburg and a member of the Council of Economic Experts that advises the government.

“Germany can accept a deviation -- a more expansive monetary policy -- from its preferred path if others are also willing to accept differences from what they’d want,” Feld said. “But in the course of the expansive monetary policy, the zeal for reform in Italy and France, for instance, has dwindled. So they haven’t fulfilled their side of the implicit contract.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE