German Economic Boom in Election Year Puts ECB in Crossfire

  • Criticism of ECB stimulus likely in run-up to September vote
  • German business confidence highest since records began in 1991

The European Central Bank is finding out just how hard it might be to avoid the heat in its home country this summer.

In the past few days, Germans have been told that their government will push for the nation to get the next ECB presidency and that monetary policy is the cause of a “too weak” euro. Fresh data on Tuesday bolstered the case for critics who see the euro-area central bank’s stimulus as out of step with the needs of the region’s biggest economy.

The Frankfurt-based ECB has long been a scapegoat in Germany, accused of robbing savers by imposing low interest rates to support the less-productive economies of southern Europe -- including Italy, the birthplace of current President Mario Draghi. That makes the institution an easy target for politicians seeking to pick up votes in parliamentary elections on Sept. 24.

“The run for presidency is quite a nice topic that German conservatives would like to use in the elections,” said Florian Hense, a European economist at Berenberg Bank in London. “It could be a topic where they mark their difference from the Social Democrats and portray them as too europhile and too lenient toward southern countries.”

Chancellor Angela Merkel, whose Christian Democrat bloc currently leads Martin Schulz’s Social Democrats in opinion polls, waded in on Monday. Asked how to deal with Germany’s trade surplus, which regularly attracts international criticism and has been a particular point of tension with U.S. President Donald Trump’s administration, she pointed to the ECB.

“The euro is too weak -- that’s because of ECB policy -- and so German products are cheap in relative terms.”

The euro has fallen by almost 20 percent against the dollar since mid-2014, when the ECB first cut its deposit rate below zero and kicked off asset purchases that would later morph into a 2.3 trillion-euro ($2.6 trillion) quantitative-easing program. In trade-weighted terms, it’s down 5 percent.

German Finance Minister Wolfgang Schaeuble revisited the topic on Tuesday at a conference in Brussels, saying the euro is too weak for Germany even as he pledged not to tell the central bank what to do.

“The ECB doesn’t need any public advice from the German finance minister. They don’t like it.”

The latest German economic figures certainly portray robust growth. Trade was the single biggest contributor to growth in the first quarter, while steadily increasing demand bolstered investment. A measure of business confidence published Tuesday rose to the highest level since records began in 1991, and a purchasing managers’ survey showed private-sector growth accelerating at the fastest pace in six years.

Yet the ECB, focused on weak inflation in the euro area, looks unlikely to move much closer to an exit from unconventional monetary stimulus when the Governing Council meets on June 8. That means savers, of which Germany has many, putting up with near-zero interest rates for a long while to come.

One way to demonstrate Germany’s heft and at the same time signal that the ECB will be brought to heel might be to push for a German to be in charge. Draghi’s term will end in October 2019 and the initial jostling for the job, which is agreed upon between the currency bloc’s national governments, has already started.

Spiegel magazine reported late last week that Merkel’s government will argue for Bundesbank President Jens Weidmann -- who used to be her economic adviser -- to succeed Draghi.

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Fine Line

“If it is confirmed that Germany wants the next president to be German, this could be seen as a sign that Berlin is increasingly impatient with the central bank’s stance,” said Gilles Moec, chief European economist at Merrill Lynch in London.

Regardless of Weidmann’s chances, standing up for German interests would play well with a minority of lawmakers in Merkel’s bloc who are concerned that the country is losing influence in the ECB, and who have led revolts against the chancellor’s support of euro-area bailouts.

Spiegel didn’t say where it got its information, and spokesmen for the government and the Bundesbank said it’s too early to debate the succession. Schaeuble said after the report that such a discussion would be “completely inappropriate” now.

Germany’s mainstream politicians are aware that they could end up walking a fine line. Not only is central-bank independence an article of faith in the country -- the Bundesbank has had autonomy since it was founded 60 years ago -- but the biggest parties are also wary of stoking anti-euro sentiment.

Schaeuble hit that note on Monday, speaking alongside his French counterpart Bruno Le Maire in Berlin. That was just two weeks after France flirted with electing Marine Le Pen as president on a pledge to break up the currency bloc, before plumping for pro-euro Emmanuel Macron.

“We know that strengthening the currency union is of particular importance. Both of us believe that Germany and France have a special responsibility to take the lead.”

That’s a key nuance from Schaeuble, who has been one of the highest-profile critics of ECB policy. Last year, he blamed it for the rise of the anti-euro Alternative for Germany party, and he has repeatedly complained that its ultra-accommodative stance is unhelpful.

His criticisms prompted Draghi to say at his press conference last month that it is “pretty ironic” to hear such comments from people who have supported central-bank independence for generations. According to Hense, there may be more to come.

“They are going to be dragged into German elections anyway,” he said. “The German saver has quite a strong voice.”

— With assistance by Birgit Jennen, and Nikos Chrysoloras

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