Arthur Beesley: Mario Draghi’s room to move may be limited
ECB boss back at loggerheads with his German foes
European Central Bank chairman Mario Draghi: is accused in Berlin of stoking the march of the anti-euro Alternative for Germany party in recent state elections. Photograph: Antonio Cotrim/EPA
European Central Bank chief Mario Draghi is in the wars again with his voluble German critics. Nothing hugely new there, yet this time it is especially fraught. So what is going on?
Weeks after the ECB boosted its contentious bond-buying programme, Draghi stands accused in Berlin of stoking the march of the anti-euro Alternative for Germany party in recent state elections. He is accused by Wolfgang Schäuble, Germany’s redoubtable finance minister and a prime figure in the long campaign to keep the single currency intact.
“I said to Mario Draghi ... be very proud: you can attribute 50 per cent of the results of a party that seems to be new and successful in Germany to the design of this policy,” Schäuble said last Friday.
In an interview with Reuters a few days later, Schäuble said record low ECB interest rates were creating “extraordinary problems” for German banks and pensioners and risked undermining public support for European integration.
Such concerns are not unique to Schäuble. They find echoes throughout the country’s economic and political establishment.
But the ECB has hit back sharply. In the guise of Bundesbank chief Jens Weidmann and other luminaries, the bank has been defending both its independence and its loose monetary policy. Weidmann’s intervention, in a Financial Times interview, was telling, as he is known to have opposed key Draghi initiatives.
Weidmann was swiftly followed by his Dutch counterpart Klaas Knot, who described himself as one of the “more critical” ECB members as he called for “patience and reality” over the bank’s expansionary policies.
All of this may seem rather academic in the narrow Irish setting. Even without a new government and with no deal in sight, the State sold 10-year debt yesterday at a record low interest rate. Still, such prices bear the deep imprint of heavy ECB bond-buying. More to the point, bitter German squabbles over the central bank’s stimulus campaign raise searching questions as to how much further it can go to revive the euro zone economy.
Ahead of the Brexit referendum, which could inflict serious damage on the Irish economy, that’s no small matter. Further concern flows from global uncertainty, which prompted warnings this week from the International Monetary Fund.
Only in Germany
This only intensifies the second argument, centred on deep objection to “helicopter” drops of money – giving cash to citizens – to spur economic activity. Some analysts say the ECB may have to take that road eventually. While the bank itself says such moves are not on the table, Draghi has said the concept is “very interesting”. Cue derision in Berlin. The very force of resistance is enough to suggest that any “helicopter” move would induce a collective heart attack among German economists.
This the backdrop to Schäuble’s plea to the European and US authorities to encourage their respective central banks to develop a gradual exit from their loose monetary policies. Almost a decade since the onset of the international crisis, this is hardly a novel idea. A tiny interest rate hike by the Federal Reserve in December marked an initial effort to change course, but the Fed has not moved since, due to anxiety about conditions in the US and the wider world.
The ECB is still very far from that point, but the German row suggests Draghi’s scope for further manoeuvre is limited.
The sense remains that a barrier may have been reached last month when the bank took its deposit rate deeper into negative territory and moved to buy up corporate as well as sovereign debt.
Jeroen Dijsselbloem, chief of the euro zone finance ministers, said as much in a speech yesterday in Washington: “Expansionary monetary policy... supports the economy in the short run, but the limitations are imminent and negative side effects are becoming stronger.”
A rather large problem is apparent, however, because the titanic task of turning around the euro zone is certainly not done. Small signs of progress may be apparent but no one suggests the battle is won. This argument will run and run.