- Frankfurt protest planned amid fear ECB wants to abolish cash
- But bigger fight may be over when to remove monetary stimulus
Mario Draghi can’t fail to hear the complaints from Germany over European Central Bank policy, but he’s just shown he doesn’t always have to listen.
Conservatives in Europe’s largest economy are vowing to push the ECB president to reverse last week’s decision to phase out the 500-euro ($569) note -- and will amplify that call at a demonstration in the institution’s hometown of Frankfurt this weekend. While Draghi’s relationship with his host country might not be getting any easier, he is signaling he won’t bow to political pressure for now.
The skirmish could augur bigger battles to come, as the gradual healing of the euro-area economy will one day justify a winding down of the unprecedented stimulus measures that the ECB has thrown at it during Draghi’s four years in charge. In timing that exit, he may well face German pressure to tighten policy earlier than is warranted, risking the same mistake the Bank of Japan was accused of in the early 2000s.
“When the economy or energy prices begin to push inflation higher, the real test will be whether the ECB has the stamina to hold on,” said Christian Odendahl, chief economist at the Centre for European Reform in London. The 500-euro note decision is “a good sign, because for that the ECB had a tough job communicating it in Germany -- and they did it anyway.”
Draghi, an Italian, was given a rough ride in the run-up to his ECB presidency by German newspapers fearful he’d bring in inflationary policies. Now the central bank is pumping 80 billion euros a month into the financial system via bond purchases, has cut its deposit rate to a record-low minus 0.4 percent, and is about to start a series of operations that could see lenders paid to take central bank cash.
Inflation is nowhere to be seen, and Draghi has given multiple interviews to national media to explain his strategy, yet he’s still resented by many in the population who see him as dismissive of German arguments. When the time comes to start unwinding those measures, it’ll probably be a finely-calibrated decision that will spark a robust debate in the public domain and on markets.
In Germany, the debate is at risk of being dragged into the campaigning for the 2017 general election. Draghi could even find himself addressing the German parliament. That would be an unusual step, but one he also took in 2012 amid the furor over the OMT bond-buying plan that helped stem the debt crisis.
Parliamentary challenge is being joined by protest on the streets. A group called Stoppbargeldverbot -- Stop The Ban on Cash -- affiliated to the insurgent anti-euro Alternative for Germany party, has organized the Frankfurt demonstration for May 14. Its leaders see a creeping effort by the German government, commercial banks, the European Union and the ECB to eliminate cash and to subject citizens to the electronic surveillance of their financial affairs.
The ECB says printing of 500-euro notes is being halted because of concerns it facilitates criminal activities. The note will stay legal tender, other denominations will remain and Draghi has said cash will continue to have a role in payments.
Nevertheless, Clemens Fuest, president of the Munich-based Ifo institute, argued on May 4 that the decision “undermines trust” in the central bank.
“Why should we not press for this decision with the 500-euro note to be revoked?” Max Otte, author of one of several books on the threat to cash published in German in the last 12 months, said in an interview. “The anti-cash lobby is very strong, and it’s also an anti-citizen lobby, an anti-freedom lobby.”
The suspicion that the ECB is up to something other than crime-fighting with its cash policy is spreading. In a world of negative interest rates, the abolition of cash would in fact come in handy for central bankers seeking to push the lower bound on interest rates further.
“Cash is the biggest enemy of negative interest rates and the ECB’s latest action not only signifies further central bank dominance but also an increased likelihood of deeper negative interest rates in the future,” said Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers in London. “The impending death of the 500-euro note has huge implications on the conduct and shape of future monetary policy.”
Yet if the only German quibble with the ECB were its policy on banknotes, it may not matter much. But another issue -- interest rates -- is front and center among the grievances expressed by German public figures who speak of the “expropriation” of the interest income otherwise owed to savers. German Finance Minister Wolfgang Schaeuble has blamed ECB policies for contributing to the rise of the Alternative for Germany party.
The general discontent isn’t limited to either Germany or the ECB. Half of respondents to an Ipsos-Mori poll in Belgium, France, Germany, Hungary, Italy, Poland, Spain and Sweden, published Monday, believe their country should hold a referendum on staying in the European Union. An average of 49 percent said Britain will vote to leave in June’s referendum.
Draghi’s position is that rates will stay where they are or even lower until “well past” the end of the asset-purchase program, currently scheduled to run until March 2017 and predicted by many economists to go longer then that.
Yet the ECB itself forecasts that inflation in the 19-nation euro area, which has fluctuated around zero for more than a year, will start rising in the second half of 2016. When that happens, the debate on the exit strategy may arrive in earnest.
The ECB, which was modeled on Germany’s Bundesbank, may find that its heritage draws it toward a willingness to leave extraordinary monetary policy behind as soon as possible, according to Holger Schmieding, chief economist at Berenberg Bank in London.
The problem is that central banks have experienced what happens when policy is tightened too soon. Citing a nascent recovery, Bank of Japan officials lifted their key rate away from zero in August 2000. Six months later, they had to reverse course when deflation returned. With hindsight, the ECB made a similar mistake itself in 2011.
“If they err, they might err on the side of normalizing early,” Schmieding said. “We will continue to have this political noise in Germany, and it will remain like that throughout the election campaign.”