Why
Draghi will try to mend fences with Germany
At
the ECB’s latest monetary policy meeting, reviving inflation will
be its main focus.
By PIERRE BRIANÇON
4/20/16, 6:28 PM CET Updated 4/20/16, 8:34 PM CET
PARIS — Ground the
helicopters.
That’s likely to
be Mario Draghi’s order of the day when the governing council of
the European Central Bank meets on Thursday, shutting down the loose
talk of “helicopter money” — or the idea of the central bank
giving money directly to consumers and companies to jump-start
spending.
What should have
been a routine meeting after the ECB’s last one on March 10, when
Draghi and his team rolled out a new round of monetary stimulus
measures, will take place under the darkened cloud of German anger at
the central bank’s unconventional policies.
But don’t expect
ECB to fire back verbal shots at German Finance Minister Wolfgang
Schäuble, who charged in a speech on April 8 that Draghi’s
monetary policies are fueling the rise of far-right party Alternative
for Germany (AfD).
Last week,
Chancellor Angela Merkel tried to calm her minister down after
reminding eurozone governments that they have to work to promote
growth while the ECB was right to focus on meeting its inflation
target. But Draghi knows he must do his part to achieve some form of
truce, if only momentarily.
Draghi doesn’t
have to reply to Schäuble directly, except to remind everyone of the
principle of central bank independence. His long-standing opponent
within the ECB — namely, Bundesbank President Jens Weidmann — has
already come to his rescue by disagreeing publicly with his own
finance minister.
“People are not
just savers: they’re also employees, taxpayers, and debtors, as
such benefiting from low interest rates,” he told the Financial
Times last week.
That should allow
the ECB president to extend some olive branches of his own. The first
could be a firm squashing of the idea that “helicopter money” is
even debated within the ECB.
In his March 10
press conference, Draghi deemed the rather radical concept dear to
academics intellectually “interesting.” He has spent the weeks
since then regretting the statement, according to an ECB source.
Draghi didn’t expect media commentators and market analysts to
debate the concept to death and how or when the ECB might do it.
It was natural that
Weidmann would jump at the opportunity to criticize the concept.
Helicopter money would “tear gaping holes in the ECB balance
sheet,” he said. But in an interview with POLITICO, even the ECB’s
“dovish” Executive Board Member Benoit Cœuré tried to squelch
the notion, expressing his “skepticism and circumspection” at an
idea that was “practically and legally problematic.”
To no avail, market
and media speculation continued.
“Just talking
about it was a red flag,” said Gilles Moec, a Europe economist at
Bank of America Merril Lynch. “I think it was a mistake, and it may
have triggered Schäuble’s anger.” Moec added that this was “the
first time that criticism of the ECB got embroiled in electoral
politics.”
One way for the ECB
to soothe the worries of German politicians and savers on Thursday
would be to insist on the fact that it is fully focused on the
measures unveiled on March 10, a few of which haven’t yet been
implemented. That’s the case with long-term lending operations to
the eurozone banks and the extension of the asset-buying program to
corporate bonds, where practical difficulties must still be
addressed.
“The ECB faces an
unusual combination of criticism compared to last year, when it was
universally lauded,” Moec noted. Then, governments, asset managers
and banks liked the role the ECB was playing to contribute to the
eurozone recovery.
Now, with negative
interest rates, governments have to listen to their savers and asset
managers upset about measly returns and banks complaining about
shrinking profits.
So expect Draghi to
return to his key message: Reviving inflation is the name of the
game, and we will stick to it.
The ECB’s
governing council will reiterate that it has plenty of potential
weapons in its arsenal, should the current policy fall short or
economic headwinds get stronger. But of course, it will “not rule
anything out” in the future (even helicopter money …) because
that’s not what central banks do.
“They have to keep
reminding people that they’re ready to do more if things don’t go
according to plan,” said Frédéric Ducrozet, a senior economist at
Pictet, the Swiss bank.
The ECB will also
insist against nay-sayers that its anti-crisis policies designed to
meet Draghi’s famous “whatever it takes” declaration in the
summer of 2012 have worked. As Cœuré is fond of saying, about half
the eurozone’s current growth can be attributed to monetary policy,
while the other half stems from lower oil and commodity prices.
Indeed, no one has
provided a picture of what the situation would be without the ECB’s
action. Missing in action more glaringly, as Merkel herself admitted,
have been eurozone governments which aren’t doing their part to
boost economic growth.
Francesco Guerrera
contributed to this article.
Authors:
Pierre Briançon
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