Germans Apprehensive About Quantitative Easing

The Germans fear debt purchases will undermine the incentive for structural reform.

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.