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It's not the Monetary Policy, ... Wolfgang!

Published on , , Twitter: @euinside
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Some EU member states are starting to suffer from Euroscepticism because of migration – internal within the EU and the coming from outside the Union. Others are losing faith in the European project because of certain common policies, mostly linked to economics, third – because of European liberalism, and fourth – because it is trendy. Germany, however, could turn heavily Eurosceptic because of Mario Draghi, the European Central Bank chief. Or so it seems lately, after a heavy conflict developed between the Italian ECB boss Mario Draghi and German Finance Minister Wolfgang Schäuble. Disagreement between the two of them regarding the ECB’s monetary policy escalated to the point of raising concerns about the independence of the institution. This was one of the most commented subjects during the informal meeting of euro area and EU finance ministers in Amsterdam last week. 

The straw that broke the patience of the German finance minister were the decisions of the ECB’s Governing Council (GC) of March 10th of this year, when the bank engaged in further loosening of monetary policy. It got to the point where Mr Schäuble attacked Mario Draghi in public, stating that the too-loose monetary policy of the bank would lead to a disaster. Berlin went even further by hinting that the next ECB boss after Draghi should be a German. Problems between Berlin and Frankfurt are not from yesterday. They date back to the peak of the euro area crisis, when Mario Draghi was looking for ways to, first of all, prevent the market disease, toppling euro area members like dominoes, and when the situation in the currency bloc got sort of level, he started supporting the lagging economic growth. Nowadays, the ECB is fighting the unsatisfactory pace of economic growth in the euro area, deflation, and in a global scope the geopolitical risks as well, the extremely low petrol prices and the Chinese financial turbulence. 

The beginning was set back in 2010 and 2011, when the Governing Council made a decision to funnel in money in euro area banks through long-term financial operations, called LTRO. Another unusual measure of the bank was the securities markets programme (SMP), whose purpose was stabilising price stability in the euro area. The first very controversial ECB policy, however, was the announced in the summer of 2012 programme for Open Monetary Transactions (OMT). It gave the start to buying of bonds on the secondary debt markets, but only for countries with a bailout programme. At that moment, several states were in such a regime, headed by Greece, Ireland, and Portugal. Such a decision of the GC of the ECB made Berlin ask for the opinion of the influential German Constitutional Court, which pronounced such policy illegal, but ruled out that the European Court of Justice had better jurisdiction. In turn, the ECJ announced that the policy was within the ECB mandate and was in no violation of European legislation. 

This decision was commented as a huge defeat for German financial policy and as a huge slap on the cheek for the almighty Wolfgang Schäuble. The ECB continued its attempts to support the recovery of euro area economy, requesting reaction by member states at every next monetary decision or interest rates' movement, in the form of conducting structural reforms and helping business. And it went so until March 10, when the GC once more took a brave step forward, announcing several decisions at a time. The first one was to lower interests on the main Eurosystem refinancing operations by 5 basis points down to 0.00%, active as of March 16. Deposits’ interests were also lowered to the negative -0.40%. The ECB also decided to widen its monthly assets purchases from 60 billion euros to 80 billion euros, starting April 1st. An expansion of this programme was announced to include the corporate sector. 

We are talking about the purchase of euro-denominated bonds of investment rating, issued by non-bank corporations within the euro area. The goal of this decision is to further relieve the borrowing conditions to finance the real economy. All of this had explosive effect on the finance ministry in Berlin, which saw a serious threat directly to the German citizen. Minister Schäuble even blamed on Mario Draghi’s policy the rise of the Eurosceptic Alternative for Germany (AfD) party, which for the first time since its inception has been positioned as a third political power at the German local elections in March. AfD managed to finish second with 24.4% of the votes in Lower Saxony province. Many analysts announced back then that the party’s success was based on Chancellor Merkel's refugee policy. Wolfgang Schäuble, however, obviously sees a field for defeat to the benefit of the party in ECB policy as well. 

In a thorough article the German Der Spiegel news magazine explained earlier this month that Schäuble’s concerns are that loose ECB policy will precipitate new bubbles in financial markets, and negative interest rates will have a negative effect on the profits of commercial banks. There is a serious threat lurking behind for German pension funds as well. The magazine also wrote that there is a new plan being prepared in Berlin for filing a lawsuit against the ECB for stepping outside its mandate. Thus the April press conference of Mario Draghi after the GC meeting was anticipated with great interest. It was dedicated entirely on answering Berlin. Mario Draghi dedicated a huge part of the press conference (questions being mainly on the same subject as well) to explanations of the bank’s policy. 

In his words, the package of decisions of March 10 has significantly improved financial conditions within the euro area, for the bank’s stimulus have finally reached businesses and households, mainly through the banking system. He believes loose policy must be kept, for global uncertainty continues and risks are still on the downside. “Looking forward, it is essential to preserve an appropriate degree of monetary accommodation as long as needed in order to underpin the momentum of the euro area’s economic recovery and in order to accelerate the return of inflation to levels below, but close to, 2%”, he said. Mario Draghi repeated several times during last Thursday’s press conference that the decisions of March 10 have improved financial conditions. 

Monetary policy is concentrated on the upholding of the price stability in mid-term plan. “We have a mandate to pursue price stability for the whole of the eurozone, not only for Germany”, said Draghi, answering a journalist’s question. “This mandate is established by the Treaty, by European law. We obey the law, not the politicians, because we are independent, as stated by the law. And by the way, all this applies to all countries, to all politicians in the eurozone”, he underlined and added that in this sense that the GC was unanimous in their support for the independence of the ECB and its monetary policy. Draghi stressed once more, however, that in order for this policy to have a full and faster effect it is also necessary that member states do their part. 

Structural reforms are key, especially in countries where unemployment is rampant and growth is below potential. The most attention must be paid to increasing productivity and improving the business environment. It is necessary to invest more into public infrastructure, which will lead to an increase of investments and job creation. It is also necessary for fiscal policy to be aimed at supporting economic recovery, careful not to step out of the fiscal rules set in the Stability and Growth Pact. 

Last but not least, Draghi pointed out that ECB policy is not much different than the policies implemented by other central banks worldwide. “And our policies work”, he insisted. “They are effective. Just give them time to fully display their effects”. He also directly replied to Germany’s request that the next boss of the ECB be German by expressing his doubt that a “non-Italian” president of the bank would push a different policy. Mario Draghi is fully convinced that the March decisions of the GC have averted secondary effects of the turbulences, caused by China at the start of the year. What is more, he presented an analysis, according to which had the ECB not made the decisions of the last few years, growth during this, the next, and the year 2018 would have been 1.6% lower than it is projected now. 

In any case, Draghi admitted that low interest rates have some effect on German pension funds. He did, however, urge the sector to stop blaming low interest rate levels for all their problems. In the USA the low interest rate policy continued far longer than in Europe, he added. A day after the press conference Eurogroup boss Jeroen Dijsselbloem, too, did clearly support ECB independence by stating: “ECB really needs to be able [to do] its work in independence. It’s not just a formal statement, it’s in our treaties but it’s also materially very important for the credibility and the effectiveness of the ECB measures. They [the ECB] need to come to those decisions in full independence. Politicians really need to refrain because anything they say, even if the ECB ignores all these political comments some people might think that the ECB is being guided by political criticism and that's the last thing we want”, explained the Dutch finance minister. 

Although reluctantly, IMF boss Christine Lagarde also commented before the start of the Eurogroup meeting in Amsterdam that ECB independence must be guaranteed. The German finance minister later said that he was misunderstood, but the tension between Berlin and Frankfurt remains. Considering the huge domestic political pressure that the German government is facing because of its refugee policy, the Eurosceptic attitudes, the upcoming British referendum, and the renewed Greek drama, Mario Draghi seems an acceptable collateral damage. What will be the price of that, however?

Translated by Stanimir Stoev

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