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Thursday, April 21, 2016
The ECB’s macro-economic assessment remained unchanged from the March meeting. Risks to the economic outlook are still tilted to the downside and the inflation outlook also remains subdued. Consequently, there was no need for the ECB to change anything in its current monetary policy stance. Interestingly, ECB president Draghi sounded more optimistic about the pass-through of monetary stimulus through the banking sector, referring to the latest Bank Lending Survey. Nevertheless, the outlook for both growth and inflation is still shaky and uncertain enough for the ECB to stay on high alert.
In a rather dull press conference, three topics stood out: the announcement of the ECB’s corporate bond purchasing programme, helicopter money and, last but not least, a reaction to the latest German war of words with the ECB. As regards corporate bonds, the ECB will start purchases in June. The ECB will purchase investment grade bonds from non-bank corporates with a maturity up to 30 years. The ECB could buy up to 70% of each issuance. No numerical target for the monthly corporate bond purchases was announced. As regards helicopter money, Draghi shot down any helicopter some market participants might have seen (or wished to have seen) in recent weeks. According to Draghi, the ECB had never discussed the concept of helicopter money. Finally, as regards the latest reencounter with Germany on low interest rates and unconventional measures, Draghi clearly said that the ECB obeyed the law, not politicians, and stressed the ECB’s independence. Moreover, he remarked that low interest rates were not the cause of problems in the German pension system and should not be mistaken with long-term structural problems. Draghi’s final comment on the debate with Germany was even clearer: too much below-the-belt criticism could eventually have a negative impact on confidence, thereby forcing the ECB to stick to its loose and unconventional monetary policy for longer than necessary.
All in all, there are two key take-aways from today’s ECB meeting: first of all, the ECB is still on high alert and would be willing to implement even more stimulus if the recovery falters or low inflation leads to negative second round effects (even though it’s unclear what these measures would really be). And, secondly, the ECB does not look willing at all to alter its monetary policies as a result of German criticism. German has become a fact of life but it will not change the ECB’s life.
Monday, April 11, 2016
German criticism on the ECB’s monetary policy throughout the crisis is not new. In recent days, however, it has entered a new stage.
It is part of the new era of information technology and media that every single comment of important policymakers and politicians is eventually broadcasted into the wide world. Even if it is a comment at the margins of ceremony of a small economic association in an even smaller city outside of Frankfurt. Last Friday, German Finance Minister Schäuble connected the recent gains of the AfD party in German regional elections at least partly to the loose monetary policy of the ECB. According to wire reports, Schaeuble said that he had told ECB President Draghi that 50% of the results of the AfD party were the consequence of the ECB’s loose and low interest rate policy.
Schäuble’s comments fit into a series of verbal attacks on the ECB by German experts, observers and regional politiicans. They could be seen as a preparation for the upcoming IMF Spring Meetings in Washington, D.C., this week, where probably the pressure on Germany to change its stance on austerity and become more stimulus-oritented will be increased again. Moreover, the German government’s position in the Greek crisis will also be put to a test again in the coming weeks. However, the tone and the direct attack of the ECB by a senior, or better one of the two most prominent, members of German government is unprecedented. Let’s not forget, Schäuble’s comments do also conflict with – at least the spirit of – the European Treaties. Article 130 says that “Community institutions and bodies and the governments of the Member States undertake to respect this principle [of central bank independence] and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks”.
German criticism of the ECB’s loose monetary policy, zero and negative interest rates and other unconventional measures is not new. It is based on the argument that low interest rates are hurting German savers (and banks and insurers) and prevent rather than stimulate structural reforms in the Eurozone periphery. What this argument, however, often fails to admit is that German savers would be worse off had the ECB stayed at the sidelines, that it is the Eurozone governments (including the German government) which fail to accelerate further reforms (be it national structural reforms or institutional reforms of the monetary union) and that the German government itself is rather falling behind on new structural reforms to increase potential growth. Finally, it has been the slow pace and inactivity of governments which frequently pushed the ECB into the position of Eurozone fire brigade. It is not a role the ECB took voluntarily.
In our view, there is no easy or one-dimensional solution for the Eurozone to gain more momentum. Obviously, the German position is not wrong, structural reforms and sustainable public finances are one of the main requirements, but it is not the entire solution. Other growth-enhancing measures are also needed. Particularly in a Eurozone, in which populist and separatist parties are gaining momentum. This includes loose monetary policy but also fiscal policies. To tackle weak growth, adverse political trends and a possible disintegration of the Eurozone, a multi-layer approach is needed.
Consequently, the current war of words is a superfluous as a fifth person on a double date. It is simply counterproductive. It won’t change the ECB’s monetary policy, which contrary to what some Germans might think, is not going after Germans’ savings but is simply trying to revive the Eurozone economy and let the monetary union survive.