Don’t Berate Schäuble for Speaking His Mind

German finance minister Wolfgang Schäuble attends a meeting in Brussels, January 27, 2014
German finance minister Wolfgang Schäuble attends a meeting in Brussels, January 27, 2014 (European Council)

Germany’s discomfort with the European Central Bank’s expansionary monetary policy has been known for years. So it’s a little odd to see commentators and politicians from other countries rush to censure Wolfgang Schäuble when the German finance minister should make his unease known.

The normally sober Financial Times calls Schäuble “desperate” for attacking the ECB and alleges that other conservatives in his country are conspiring with commercial banks to whip German savers into a revolt against the Frankfurt-based central bank.

If Schäuble has doubts about the bank’s policy, “such conversations are best conducted in person, not in public,” according to the Financial Times.

Since central bankers correctly regard credibility and independence as one of their most powerful tools, they will go out of their way to be seen resisting political pressure.

Schäuble’s counterpart in Paris, Michel Sapin, chimed in, saying, “France learned the hard way that one must absolutely, completely and fully respect the independence of the central bank. I hope our German friends remember this point, which they helped prevail.” Read more

Dutch, German Central Banks Criticize Quantitative Easing

Dutch prime minister Mark Rutte and finance minister Jeroen Dijsselbloem welcome European Central Bank president Mario Draghi in The Hague, April 15, 2013
Dutch prime minister Mark Rutte and finance minister Jeroen Dijsselbloem welcome European Central Bank president Mario Draghi in The Hague, April 15, 2013 (Rijksoverheid)

The chief central bankers of Germany and the Netherlands have criticized the European Central Bank’s “quantitative easing” policy, voicing concern that “easy money” will discourage less competitive euro states from enacting liberal economic reforms.

The Financial Times reports that Jens Weidmann, head of the Bundesbank, has cautioned that cheap government financing could convince politicians in France and Italy that further reforms are unnecessary:

If the member states get used to such financing conditions, it could lead to a lessening of their motivation for further consolidation or reform measures.

Fear of deflation

Weidmann’s warning came only days after the ECB’s Mario Draghi launched a €1.1 trillion bond-buying scheme designed to boost growth and stave off the prospect of deflation.

Inflation has been below the 2-percent target since the European sovereign debt crisis began in 2008.

Discipline

Weidmann’s Dutch counterpart, Klaas Knot, was more explicit, warning “there will be no market discipline or very little market discipline” on governments that continue to spend more than they raise in revenue:

This means that budgetary rules have become even more important to safeguard discipline in government budgeting.

Yet earlier this month, the European Commission gave Belgium, France and Italy reprieve from the bloc’s budget rules, allowing them to post deficits in excess of the 3-percent treaty limit — provided they reform.

Rules

Knot pointed out that France has broken the budget rules for eleven of the past sixteen years.

“For each individual year, you can come up with an explanation about an extraordinary recession or circumstances,” he said. But if exceptions are made almost every year, it “undermines support for the European project.”

France did introduce liberalizations last month, but corporate taxes and the cost of doing business remain higher in the country than in most.

Critical media

Dutch and German media were critical when Draghi first announced the quantitative easing program in January.

De Telegraaf, the Netherlands’ largest newspaper, praised Knot at the time for joining his counterparts from Austria, Germany and Estonia in voting against the program.

Germany’s conservative Die Welt warned that Germans were losing confidence in the central bank. Handelsblatt likened Draghi’s stimulus to a “drug” and the tabloid Bild asked, “Is the ECB banker destroying our money?”

Unlike Draghi, the Germans — still haunted by the experience of hyperinflation in the 1920s — do not see falling prices as a problem. Weidmann argued it was only a “temporary” phenomenon. It would have been better to see it out the fall in oil prices, he said.

Dutch, Germans Critical of European Quantitative Easing

European Central Bank president Mario Draghi answers questions from reporters in Frankfurt, December 4, 2014
European Central Bank president Mario Draghi answers questions from reporters in Frankfurt, December 4, 2014 (ECB)

European Central Bank president Mario Draghi said on Thursday his institution would start pumping €60 billion per month into the European economy until September next year or until inflation reaches its 2 percent target. Media in Germany and the Netherlands did generally not take kindly to the announcement.

The policy of quantitative easing is controversial in both countries. Dutch and German officials worry that “cheap money” will discourage budget consolidation and structural economic reform in other states, such as France, Greece and Italy.

The central bank says it will accomplish its stimulus by buying government bonds from member states relative to their size, meaning Germany will be the largest direct beneficiary of the policy, even if it borrows little and already pays extremely low interest rates.

Draghi’s announcement was widely expected because the eurozone was looking at deflation. Falling oil prices pushed the bloc’s inflation rate below zero at the end of last year.

Inflation has been below the Frankfurt bank’s 2 percent target since the European sovereign debt crisis began in 2008.

In a concession to Germany, Draghi said asset purchases would be subject to risk sharing. 80 percent of potential losses would fall on national central banks.

American and British financial media responded positively to Draghi’s announcement. Bloomberg’s Mark Gilbert cheered the central bank president for dragging “the Bundesbank kicking and screaming into quantitative easing.” The Wall Street Journal said the policy could benefit the United States. “A more vibrant eurozone would provide more fuel for the global economy, stimulating the appetite for American goods and services around the world.” Britain’s The Economist was only slightly less supportive, calling the policy “better late than never” and cautioning it might turn out to be less effective than similar actions taken in Japan and the United States.

Dutch and German media were far more critical. Elsevier, the Netherlands’ leading right-wing weekly, said the assumption that bond purchases will stir more economic activity was dubious at best. It pointed out that the European Central Bank is already lending hundreds of billions of euros at low interest rates to eurozone banks in hopes they, in turn, will lend more to companies and consumers. That has hardly happened. “This is unlikely to change,” the magazine predicted.

De Telegraaf, the Netherlands’ biggest newspaper, lauded Dutch central bank president Klaas Knot for joining his colleagues from Austria, Germany and Estonia in opposing the latest measures.

Germany’s conservative Die Welt newspaper warned that Germans were losing confidence in the central bank. Handelsblatt likened Draghi’s stimulus to a “drug” and the tabloid Bild asked, “Is the ECB banker destroying our money?” Even the leftist Süddeutsche Zeitung argued that German savers were being “penalized”.

Germans Apprehensive About Quantitative Easing

German chancellor Angela Merkel speaks with her finance minister, Wolfgang Schäuble, in parliament in Berlin, September 10, 2014
German chancellor Angela Merkel speaks with her finance minister, Wolfgang Schäuble, in parliament in Berlin, September 10, 2014 (Wikimedia Commons/Tobias Koch)

Whereas most financial markets seem to relish the prospect of quantitative easing by the European Central Bank, the eurozone’s most powerful member is apprehensive about an “easy money” policy that it fears will discourage structural economic reforms in the periphery of the currency union.

European Central Bank president Mario Draghi is expected to announce a new bond-buying program on Thursday in an effort to stave off deflation.

Falling oil prices have pushed the eurozone’s inflation rate below zero for the first time in five years. Last week, the euro also touched an eleven-year low against the American dollar.

The Frankfurt bank’s inflation target is close to 2 percent. It has been well below that target since the European sovereign debt crisis began in 2008.

The Germans do not necessarily see the problem. Jens Weidmann, president of the German Bundesbank, has said that while cheaper energy weighs on inflation in the short term, it also stimulates the economy. Cheaper oil, after all, means lower costs for industries and consumers.

Germany’s opposition to monetary stimulus is rooted in history. Many Germans still attribute the Nazis’ rise to power to hyperinflation in the 1920s and early 1930s.

But there is a more practical reason why today’s Germany opposes quantitative easing on the American model. Leaders fear eurozone countries that have been reluctant to cut their deficits and liberalize their economies, like France, Greece and Italy, will be under even less pressure to do so if the central bank bought more of their debt.

Greece has repeatedly missed deadlines for budget consolidation and reform while France and Italy got another extension from the European Commission late last year to bring their deficits below the 3 percent treaty limit.

Chancellor Angela Merkel’s hawkish finance minister, Wolfgang Schäuble, warned in an interview with the tabloid Bild last month that “cheap money should not be allowed to dent the reform zeal in some countries. There is no alternative to structural reforms — if things are going to improve again,” he insisted.

Weidmann shares Schäuble’s views and is expected to vote against any form of quantitative easing Draghi proposes. However, a majority of central bank presidents is likely to back the Italian chairman, including those from Finland and the Netherlands who previously supported the German position.

Germany’s irritation is heightened by the situation in Greece where the far-left Syriza party is predicted to win an election next week. It has pledged to renegade on Greece’s bailout agreements and negotiate a further reduction in Greek debts.

Der Spiegel reported that Greece might be excluded from a bond-buying program.

The Financial Times reported on Sunday that Draghi was likely to compromise on elements of his policy in order to appease the German public. “But resistance is so fierce that this might not be enough,” the newspaper warned.

Bild headlined on Monday, “Mario Draghi expropriates the German saver.” The financial weekly WirtschaftsWoche condemned low interest rates as a “diktat from a new Banca d’Italia, based in Frankfurt” — a reference to the central bank president’s Italian citizenship. The Frankfurter Allgemeine Zeitung cautioned that the economic effects of quantitative easing would be “uncertain” and argued, “Government bond purchases, if undertaken at all, should be the last resort of monetary policy.”

Compromises Draghi could make include only buying short-term sovereign bonds and buying debt from all eurozone countries to avoid the impression of budgetary assistance for some.

Weidmann has signaled that he would be less critical of quantitative easing if the burden of losses were placed on national central banks. The alternative would “lead to a redistribution of risks between taxpayers in the member countries,” he said last month.

Germany opposed the pooling of eurozone sovereign debts in the form of “eurobonds” for the same reason.

Last year, the central bank bought €1.7 billion worth of secured bank debt under its third bond-buying program since 2009. Under the first, it purchased €60 billion of the same securities. Under the second program, it bought less than half of the €40 billion it had budgeted. Its total balance sheet stood at almost €2.2 trillion by the end of last year.

Is Austerity Losing the Battle in Europe?

German chancellor Angela Merkel speaks with her finance minister, Wolfgang Schäuble, in parliament in Berlin, September 10
German chancellor Angela Merkel speaks with her finance minister, Wolfgang Schäuble, in parliament in Berlin, September 10 (Wikimedia Commons/Tobias Koch)

The different measures implemented in Europe in order to boost growth through increased monetary action, investment and structural reforms have replaced austerity as the new dominant dogma. While Angela Merkel is adapting to the new situation, Bundesbank president Jens Weidmann disagrees with more budget flexibility and a possible QE by the European Central Bank (ECB) in 2015.

In the past few days, Andrea Bonanni, Brussels correspondent for the Italian newspaper La Repubblica, published an article in which he announced that Angela Merkel and Germany had lost the long battle over austerity in Europe.

Firstly, the last G20 summit saw agreement on a range of measures intended to increase global GDP growth. Secondly, the ECB is preparing a bond-buying programme for early 2015. And thirdly, the European Commission has given additional time to Italy and France to fix their budgets in line with European Union rules. Thus the Italian journalist has declared Italy’s Matteo Renzi and France’s François Hollande winners, having enabled Europe to turn the page and prioritize reforms and economic growth rather than austerity.

However, Josef Janning, a senior policy fellow at the European Council of Foreign Relations (ECFR) in Berlin, does not think that those advocating austerity are losing the political battle in Europe.

The concept of fiscal sustainability is seen in Berlin and other northern capitals not as an end in itself but as a means to enable more action by government to promote a competitive economy and to open up opportunities for growth.

French weekly newspaper Courrier International has also reported on Bonanni’s article, illustrating it with a cartoon where Angela Merkel appears riding a pig (an allusion to the “PIIGS” acronym).

According to the ECFR analyst, European media outlets are too critical of the German chancellor and too little attention is being paid to the effects a departure from the fiscal stability schemes would have inside the eurozone.

“It would kill the euro before the chance of building better governance in member states could be seized,” warns Janning.

As the article from La Repubblica states, Merkel continues to force countries like Italy and France to implement additional efforts of tax consolidation in order to safeguard her position with the German electorate.

“I see that as an exaggeration which seems to serve domestic purposes,” says Josef Janning.

Merkel does not force countries; she reiterates the commitments EU countries have signed in the treaties and eurozone rules. Of course, the German electorate appreciates this position.

Over the last number of weeks, Bundesbank president Jens Weidmann is also being portrayed as the real instigator of inflexible and orthodox austerity ideas spreading all over Europe. On this, Janning believes that “the mainstream economists in Germany have indeed been on the orthodox side of the argument,” which has had echoes in the Bundesbank.

In addition, he does not believe that inflexibility is a criterion of austerity as such but “the product of mistrust in compliance with treaty rules” and recalls that “Merkel herself has stated in the German parliament that she would even accept Eurobonds, if there was assured compliance with the rules.”

Meanwhile, Jens Weidmann continues to voice his strong opposition to any program of sovereign-bond purchases by the ECB. In an interview with three newspapers from the largest European countries (El País, La Repubblica and Le Figaro), the Bundesbank president stated that “at least for now, monetary policy must not react” against low inflation in the euro area (.3 percent in November), considering that low inflation rates are due to the fall of energy prices. Besides, he repeated that France should increase its competitiveness, reduce its government spending ratio and meet the targets agreed with the European Commission.

“It would be very unfortunate if the impression were to arise that the rules were ultimately negotiable and consolidation could be pushed further and further back by national governments,” stressed Jens Weidmann.

This story first appeared at The Corner, Spain’s only English-language financial news website, December 18, 2014.

Central Bank “Doing Nothing” to Save Eurozone?

European Central Bank president Mario Draghi in Berlin, Germany, March 26, 2012
European Central Bank president Mario Draghi in Berlin, Germany, March 26, 2012 (Bankenverband/Frank Ossenbrink Media Group)

The European Central Bank has purchased more than €200 billion worth of Greek, Irish, Italian, Portuguese and Spanish government bonds but apparently it’s not enough. Quartz‘ Simone Foxman complains that the central bank is “still doing nothing” while Europe sinks into recession. Why? Because the bank kept its interest rate unchanged at .75 percent on Thursday, “continuing a policy that has done little to save the eurozone from a deepening recession.”

Foxman admits that the central bank’s decision is unsurprising. Unlike their American counterparts, the central bankers in Frankfurt conduct monetary policy, or are supposed to, with regard to price stability alone, not economic growth.

Except they haven’t, really. Throughout the European sovereign debt crisis, the central bank has stepped in repeatedly to save the day. Most recently, in September of last year, President Mario Draghi announced a potentially unlimited bond purchase program to quell what he described as “unfounded” fears about the single currency’s survival.

Germany’s central bank president Jens Weidmann was the only member of the governing council to dissent, warning earlier of the “danger that central bank financing can become addictive like a drug.” The thinking in Berlin being that if Southern European states like Italy and Spain can reduce interest rates on their bonds by having the central bank buy billions worth of them, governments there will be under less pressure to reduce spending and reform. Read more

Necessary Financial Correction Has Yet to Come

The Financial District in Lower Manhattan, New York, November 10, 2011
The Financial District in Lower Manhattan, New York, November 10, 2011 (Steve Minor)

The recent quiet in the eurozone and American politicians’ cavalier teetering on the brink of a “fiscal cliff” seem to suggest that the crisis is over. But the lack of urgency on the part of policymakers mustn’t be mistaken for an actual improvement in the economic prospects of both Europe and the United States.

The crisis that started in the American housing market in late 2007 and became a global financial panic in 2008 isn’t over. Rather the necessary contraction has been extended by government deficit spending and central bank financing. The former has seemingly run its course. The latter may go on for much longer, perhaps even as long as it takes for the economy to rebalance itself. Or it may not. In which case the collapse will be all the greater when it does happen.

The American Federal Reserve certainly seems to think it can go on. In early December, it announced that it would continue to pump money into the economy until unemployment drops below 6 percent. Financial markets were ecstatic. It means cheap money at least until the game is up. But the move is really one of desperation. Every policy option has been exhausted. The only thing left to do is continue to prop up a banking sector that should have partly gone under in 2008 with evermore free money — debasing everyone else’s money in the process.

The Federal Reserve tried this before. Indeed, it’s what brought on the housing bubble in the first place. When the dot-com bubble burst around the turn of the century, the central bank managed to stave off the contraction that was necessary to correct the hype of the late 1990s.

The money it poured into the economy to keep the financial industry afloat found its way into speculative if not outright ludicrous mortgage products. Combined with semi-private mortgage providers Fannie Mae and Freddie Mac that were politically incentivized to loan to low-income households that no truly private bank would have ever considered taking on as clients, it made for a dangerous situation indeed that had to blow up. Read more