Draghi's German Baggage Follows Him to Washington After ECB Spatby and
Schaeuble, Draghi likely to meet during IMF spring meetings
German critique highlights concerns over pensions, politics
Once again, Europe’s most powerful financial policy makers are taking more baggage to Washington than they’d planned.
German Finance Minister Wolfgang Schaeuble and European Central Bank President Mario Draghi are both attending International Monetary Fund meetings this week, fresh from a dust-up that highlights German anger at unprecedented euro-area stimulus. The latest iteration of a long-running spat risks undermining the rest of the world’s faith in the region’s ability to agree on a path to sustainable economic growth.
Schaeuble raised the temperature last week when he said Draghi shares the blame for the ascent of populist political groups, and followed up on Tuesday by saying ECB policy is causing “extraordinary problems” for German pensions. While Draghi hasn’t publicly responded, Germany’s own central-bank head recently criticized the nation’s thinking as too narrow and stressed the ECB’s independence.
“The climate in Germany is anti-ECB,” said Christian Odendahl, chief economist at the Centre for European Reform, a London-based think tank. “There is a danger that German criticism of the ECB undermines the confidence of investors and businesses abroad that the euro zone can solve its still substantial economic and institutional problems.”
Schaeuble and Draghi will probably meet each other at the gathering of IMF and Group of 20 officials, a finance ministry spokesman said on Monday. Given Draghi’s commitment to do whatever it takes to lift inflation in the 19-member currency bloc and German doubts over monetary or fiscal stimulus, any detente may not last long.
This isn’t the first time that the chief of the Frankfurt-based ECB -- which is modeled on Germany’s Bundesbank -- has faced off with officials from the euro area’s largest economy at an international event. During the IMF meetings in October 2014, he pledged looser policy if needed even as Schaeuble warned against quantitative easing. At the same meeting, Germany’s Focus magazine reported, without citing anyone, that Draghi found cooperating with Bundesbank President Jens Weidmann had become “almost impossible.”
It’s also reminiscent of the struggle to resolve a standoff over aid for Greece that reached the agenda of a Group of Seven summit in southern Germany in June 2015. The signal being sent is that the euro-area setup is too clumsy to resolve internal differences efficiently.
For Nicolas Veron, a visiting fellow at the Peterson Institute in Washington, that makes the ECB’s job harder, though not impossible.
“We’ve seen time and again the ECB being able to act, handling political constraints,” Veron said, citing the relatively late arrival of QE in March 2015 as an example. “But in the end the ECB has been able to do what it should do.”
Criticisms of policy from high-level officials can be damaging to the ECB’s standing, even if they don’t change how it acts, according to Richard Barwell, a former Bank of England employee who is now senior economist at BNP Paribas Investment Partners in London.
That makes the comments by Weidmann especially useful for Draghi. Although the Bundesbank president opposed the ECB’s March stimulus package, he defended the institution in a Financial Times interview conducted on April 7 and published on Tuesday.
The German debate “does not focus enough on the broader macroeconomic consequences of monetary policy,” he said. “It’s not unusual for politicians to have opinions on monetary policy, but we are independent.”
Weidmann is “the best-placed person in Germany to stand up for the ECB,” said Barwell. “It’s easy to forget that the currency union is very young. People are still looking at euro-zone policy through the prism of ‘does this work for my country?”’
While Schaeuble has tapped into broad German concern over Draghi’s policies, his comments can also be traced to domestic politics. Low rates are eroding the ability of pension providers to meet their payout obligations, a core issue in a country with an aging population. The German finance minister last week laid part of the blame for the rise of the right-wing, populist Alternative for Germany party at the ECB president’s feet.
The Netherlands faces a similar struggle over retirement funding, prompting Governing Council member Klaas Knot to tell the Dutch parliament on Wednesday that while he’s one of the more critical members of the policy-setting body, “patience and reality” is needed to judge the impact of current stimulus.
The ECB’s oft-repeated view is that it’ll do more if needed, but it can’t right the economy single-handedly. The onus is on governments to use “fiscal space” where they can -- a remark generally considered to be aimed largely at Germany -- and make structural reforms.
German Chancellor Angela Merkel, questioned about ECB policy on Wednesday, said euro-area governments must do their part to promote growth and generate inflation as a way to enable the central bank to alter its policy. The IMF agrees, and it has also called for fiscal measures.
“Monetary policy must be complemented by concerted efforts to accelerate the repair of private sector balance sheets -- especially in the euro area,” the IMF said in its World Economic Outlook report this week. “Stronger near-term fiscal policy support” should provide a “fillip to growth.”
Again though, Schaeuble plans a tough line. He sees no need to sound the alarm on the state of the world economy, which isn’t as dire as some might consider, a government official said on Tuesday on condition of anonymity.
Speaking in New York on Wednesday, ECB Vice President Vitor Constancio said that while there has “recently been quite some push-back against monetary policy in certain quarters,” stimulus is doing what it must to get the economy back on track.
The euro area’s inflation rate was zero last month, a report on Thursday showed. While that’s an upward revision from the initial estimate of minus 0.1 percent, it’s still far below the goal of just below 2 percent -- a rate that hasn’t been reached in three years.
And Germany’s criticism of the ECB hasn’t gone unnoticed elsewhere in the euro area.
“The French had to learn, and it wasn’t easy, to respect the absolute independence of the central bank,” French Finance Minister Michel Sapin said on Wednesday. “I say it in a very friendly way, the Germans must not lose their good habits.”