Merkel Dodges Draghi Call for Clarity With Bank Union Swerve

  • ECB had no alternative to rate cut, Draghi told EU leaders
  • Germany blocked Portugal's push for wording on bank framework

European Central Bank President Mario Draghi pushed European Union leaders for clarity on the future of the euro on Thursday. But Germany still chose to skirt a critical area of disagreement with its partners.

During a closed-door session in Brussels, Draghi told EU leaders that the most important thing they could do would be to set out a clear path forward for the monetary union, according to two officials familiar with deliberations.

When Portugal later called for a specific commitment to discuss banking union at an upcoming summit in June, German Chancellor Angela Merkel said such language wasn’t warranted, the officials said, asking not to be named because the talks were private. A spokesman for Merkel didn’t immediately respond to a request for comment.

The dance between Europe’s two most powerful policy makers shows the balancing act they’re engaged in as they try to consolidate the economic gains of recent years while keeping their different constituencies on board.

Merkel, struggling to reassure her voters that she can get a grip on immigration flows, is sensitive to the risk of a domestic backlash against underwriting bank deposits in the rest of the bloc; Draghi has already faced German dissent in his battle to fan inflation across the currency union.

German View

The ECB is mindful of German concerns that low interest rates are hurting banks and taking too much pressure off of more indebted countries, said ECB Executive Board member Peter Praet in a La Repubblica interview published Friday. Even so, he pushed back against criticism of negative rates, saying that what drives the German view is “mistrust” of indebted countries’ commitment to addressing their structural problems.

“As long as you have a positive impact on the economy from negative rates, you have better growth” which helps banks, Praet said. “The problem for banks is not 2016, it is the medium term. If the situation becomes persistent and the business model is not adjusted, then profitability becomes a major issue.”

Earlier in the week, Merkel said the ECB actions shouldn’t be allowed to mask the need for countries to take their own actions. Because economic growth rates aren’t “roaring skyward,” it raises the question of “what can be done besides interest-rate and monetary policy to improve growth rates,” she said Wednesday in Berlin. “I never tire of saying that we’re not doing enough structural reforms.”

Germany’s government is itself resisting calls to raise extra government spending beyond covering refugee costs as it seeks to adhere to its balanced budget goal. Finance Minister Wolfgang Schaeuble has said that Germany is taking some stimulus measures by caring for refugees and integrating them into German society.

Defending Stimulus

At Thursday’s summit, Draghi said the ECB has “no alternative” to its recent rate cuts and monetary policy actions, and he encouraged them to support the central bank by reassuring savers, insurers and bankers about potential market distortions or risks to financial stability from the latest stimulus efforts. Draghi also spoke to reporters after leaders wrapped up the economic part of their deliberations and he left the meeting.

“I made clear that even though monetary policy has been really the only policy driving the recovery in the last few years, it cannot address some basic structural weaknesses of the euro-zone economy,” Draghi said. He also pledged that rates would stay low and that the ECB would use “all the appropriate instruments” as the outlook requires. An ECB spokesman declined to comment on the private discussions.

The ECB chief is seeking to shore up his support after unleashing an unprecedented package of rate cuts, increased bond-buying and other measures last week. Unveiling the plans, Draghi said the central bank is done with the “nein zu allem -- no to everything” mentality that some nations have expressed in the past.

Draghi also told the leaders on Thursday that there are limits to what monetary policy can accomplish on its own, and he urged them to make the most of fiscal space and structural reforms that can boost employment, the officials said. Draghi said savers should be reminded to focus on real interest rates, not nominal rate levels, and that banks and insurers should adjust their business models to monetary policy as needed.

Diplomatic Silence

European Commission President Jean-Claude Juncker responded by reminding the central bank chief that governments are restrained by EU custom from commenting on monetary policy. At the same time, the officials said, he told the leaders that he supported the ECB’s recent actions and felt they could be a “game changer” for the economic outlook.

One particular area of German opposition has been further moves on banking union. The euro area has already adopted common banking supervision and resolution frameworks, while stopping short of creating a common deposit insurance framework.

Germany has said it can’t proceed with pooling guarantees until the euro area has addressed broader questions about sovereign debt risk and financial stability. Draghi identified the euro area’s lack of joint deposit insurance as one of the main policy changes facing the EU, in February comments to the European Parliament.

In their final conclusions on Thursday, leaders pledged to “discuss the progress achieved in the work toward completing the Economic and Monetary Union” -- leaving out the phrase “notably the banking union” that Portugal had asked to insert, the officials said.

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