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.
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:
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.
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.
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.
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. 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. Read more “Central Bank “Doing Nothing” to Save Eurozone?”
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. Read more “Necessary Financial Correction Has Yet to Come”
European finance ministers agreed early Thursday morning to empower the European Central Bank to supervise the bloc’s largest banks, a deal that is expected to be ratified by European leaders on Friday. Britain, the Czech Republic and Sweden opted out of the arrangement.
Under the agreement, the ECB will monitor banks with assets that are worth more than €30 billion or the equivalent of 20 percent of their state’s gross domestic product, excluding small and regional banks that aren’t heavily exposed to sovereign debt. Some two hundred out of the roughly 6,000banks in the eurozone would fall under the new regime. Read more “Britain, Sweden Opt Out Centralized Banking Oversight”
Despite German resistance, the president of the European Central Bank Mario Draghi on Thursday announced a potentially unlimited bond purchase program to quell the “unfounded” fears of investors about the survival of the euro.
“Under appropriate conditions, we will have a fully effective backstop to prevent potentially destructive scenarios,” Draghi told a news conference after the central bank’s monthly meeting in Frankfurt. Bundesbank president Jens Weidmann was the only dissenting member of the governing council.
Weidmann warned last month of the “danger that central bank financing can become addictive like a drug.” If Southern European states like Italy and Spain can reduce interest rates on their bonds by having the central bank buy billions worth of their debt, their governments will be under less pressure to reduce spending and liberalize their economies.
There is strong opposition in Germany to the European Central Bank possibly buying peripheral bonds to rein in the borrowing costs of countries in the periphery of the eurozone.
Jens Weidmann, president of the German Bundesbank, warned in Der Spiegel this week of the “danger that central bank financing can become addictive like a drug.” If Southern European states like Italy and Spain can reduce interest rates on their bonds by having the European Central Bank invest billions in them, as it did in August of last year, their governments will be under less pressure to reduce spending and liberalize their economies.
Weidmann added that the central bank buying bonds is “too close to state financing via the money press.” Indeed, that is exactly what it amounts to for the money used to buy peripheral debt is created out of thin air.
Jörg Asmussen, the other German on the European Central Bank’s executive board, said on Monday that “the ECB will only buy bonds with short maturities.” Central bank president Mario Draghi inisted earlier this month that countries “need to go to the EFSF” first, the European Financial Stability Facility, to request aid before the ECB could step in. He stressed, “the ECB cannot replace governments,” repeating the mantra of his predecessor Jean-Claude Trichet.
However, Italy and Spain are reluctant to apply for a bailout through the EFSF because, as was the case in Greece, Ireland and Portugal, such a rescue operation should come with string attached: more austerity measures that are increasingly unpopular in both countries.
Italian prime minister Mario Monti has campaigned for intervention from Frankfurt since January. “Despite these sacrifices,” he said at the time, referring to Italy’s budget and economic reforms, “we do not see concessions from the EU, such as in the form of lowered interest rates.” In an interview with Il Sole 24 Ore this week, he argued that inaction on the part of the European Central Bank somehow actually heightens the risk of inflation in Germany, which is the long-term effect of monetary expansion feared by the Germans.
Preventing the ECB, as the Bundesbank wants, from intervening in the sovereign bond markets to temper [borrowing costs] imbalances may turn out to be, from Germany’s point of view, an own goal with paradoxical effects.
Economist Jürgen Stark, who resigned from the ECB’s executive board in dismay in September of last year, wrote in the paper Handelsblatt on Tuesday that, “There is a danger of high inflation — not today, not tomorrow but in the medium to long term.” He added that the central bank has “repeatedly crossed red lines” and that plans to buy government bonds amounts to “illegaly financing states.”
The same newspaper last June observed that “the balance of power in Europe has changed” from north to south. The prospect of a “transfer union,” the permanent bailing out of weaker states in the periphery of the single-currency union at Germany’s expense, is starting to become a reality.
An editorial in the conservative Frankfurter Allgemeine Zeitung at the time similarly warned that “the conditions for EU aid are increasingly blurred.”
German parliamentarians, from the ruling conservative and liberal parties as well as the opposition, regard in apprehension Chancellor Angela Merkel’s “concessions” to Southern European states who need help to stave off financial panic and sovereign bankruptcy. €100 in European support for the Spanish banking industry was pledged without conditions of economic reform on the part of Madrid. The European Central Bank has already purchased more than €200 billion worth of Greek, Irish, Italian, Portuguese and Spanish bonds without strings attached. How long will the Germans tolerate such rescue efforts if there appears to be no structural improvement in the economic and fiscal health of peripheral eurozone states?