ECB
has an inflation problem … called Germany
With
prices rising in the eurozone, critics of Mario Draghi’s easy-money
policy are out in force.
By JOHANNA
TREECK 2/1/17, 4:30 AM CET
FRANKFURT — The
eurozone has reached its inflation target for the first time in four
years, but European Central Bank chief Mario Draghi has no time to
rest on his laurels: He must now brace for renewed attacks on his
easy-money policy in Germany.
Overall inflation
for the 19 countries that use the euro in January came in at a
preliminary 1.8 percent — within a whisper of the ECB’s official
target of “below, but close to, 2 percent,” but core inflation,
which strips out volatile food and energy prices, was unchanged from
December at 0.9 percent, making any immediate change in policy
unlikely.
However, with German
elections looming this September, and top-selling tabloid Bild
featuring a “horror curve” showing that despite the spike in
inflation — which was even higher in Germany, at 1.9 percent in
January — savers are still earning nothing thanks to the policy of
negative rates to spur spending elsewhere in the eurozone, Draghi’s
problems are more political than economic.
“Someone has to
put a stop to Draghi,” said Jörg Meuthen from the far-right,
Euroskeptic Alternative for Germany (AfD), which has high hopes of
entering the Bundestag (lower house of parliament) for the first time
in September. The party is keen to play on the collective German
memory of hyperinflation in the first decades of the 20th century.
Other inflation
hawks, including mainstream figure like Bavarian Finance Minister
Markus Söder, are frustrated with Draghi’s insistence that he
cannot tailor monetary policy for the eurozone to the needs of the
Germany economy, which is growing much more robustly than neighboring
countries who still need the ECB’s support.
With Euroskeptic
populists challenging the established order in elections this year in
Germany, France and the Netherlands, the ECB will come under
increasing pressure to explain why it is doing what it’s doing,
said Anatoli Annenkov, economist at Société Générale. While he
assumes a slow recovery in core inflation, “we had years and years
of downside surprises and now that it is going up, we might also see
upside surprises,” he said.
Crumbling façade
Beyond Brexit and
fears of protectionist policies from the new U.S. administration, the
ECB is bracing for internal pressure from the largest economy in the
eurozone.
In his most recent
press conference, Draghi attempted to project unity among the ECB’s
governing council in support of the €2.3 trillion bond-buying
program (“quantitative easing,” or QE in central bank parlance)
designed to stimulate the eurozone economy.
But that façade
crumbled just days later when German executive board member Sabine
Lautenschläger suggested it might be time to bring the policy to an
end. “All preconditions for a stable rise in inflation exist. I am
thus optimistic that we can soon turn to the question of an exit,”
she said in a speech last week.
Her former boss,
Bundesbank President Jens Weidmann, has also signaled that the ECB
should let economic data — rather than its previous commitment to
keeping quantitative easing running until the end of 2017 — dictate
its policy in the coming months.
If economic
forecasts from the ECB’s own staff point to higher growth and
inflation, hawkish pressure from the Germans on the governing council
will almost certainly increase.
Waiting for Godot
Such a spat on the
ECB’s governing council could harm German Chancellor Angela
Merkel’s prospects of winning a fourth term in September’s
elections, by putting her in the awkward position of either trying to
retain her credentials as a “good European” by refraining from
pressuring the ECB — or doing an about-face to compete for angry
savers’ votes.
Merkel, speaking in
Stockholm on Tuesday, said it was beyond her powers to get the ECB to
change course: “We won’t exercise any influence over the European
Central Bank, so I can’t and I don’t want to change the situation
as it is now.”
Although he
understands German political dynamics and the importance of keeping
Berlin onside, Draghi has been steadfast in insisting that his
mandate is to look after the eurozone as a whole, including
debt-ridden southern European economies like Italy and Portugal for
whom the sudden withdrawal of quantitative easing could prove
premature and dangerous.
“Waiting for
higher interest rates may soon appear like waiting for Godot,” the
influential conservative paper Frankfurter Allgemeine Zeitung
lamented Tuesday. “The ECB has become hostage of indebted
countries.”
Carsten Brzeski, an
economist at ING, said the ECB has nothing to gain from an
increasingly rancorous debate about its monetary policy. It should be
relatively easy to get a broad majority within the ECB to announce
this summer a gradual “tapering” of the stimulus policies
starting in January next year, which would be a “face-saving
compromise.”
“However, by
starting a permanent public mud fight, where actually no fight is
needed, the ECB’s reputation is likely to suffer,” said Brzeski.
Authors:
Johanna Treeck
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