Schaeuble vs Draghi

April 10, 2016

schaeubledraghi.jpgIt’s no secret that Wolfgang Schaeuble has a dim view of how the ECB has conducted monetary policy. For years he has been sending out warnings about Mario Draghi’s cocktail of low interest rates, bond purchases and generous liquidity for banks. Euro zone inflation may be in negative territory, but for Schaeuble, the ECB’s extraordinary measures are unjustified. He has said repeatedly that they risk creating new financial bubbles. Still, until the past few days, Schaeuble’s criticisms were mostly polite and indirect. Now, suddenly, the gloves appear to be off.

On Friday evening in Kronberg near Frankfurt, Schaeuble received the Wolfram-Engels prize from the Stiftung Marktwirtschaft, a foundation, which according to its website, stands for “Ordoliberal thinking and action”. This was a group receptive to Schaeuble’s message and he didn’t disappoint. In comments that were picked up by a Dow Jones reporter, Schaeuble went so far as to blame Draghi for the rise of the Alternative for Germany (AfD), a new anti-immigration, anti-euro party that surged into three regional parliaments last month with stunningly strong scores. The party is seen as a rising threat to Schaeuble’s CDU and its Bavarian allies, the CSU.  Here is the Schaeuble quote from the DJ story: “I said to Mario Draghi…be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy.” This is tough stuff. I spoke to one ECB official on Sunday evening who agreed that the German minister was taking his criticism of the ECB to new heights (or lows depending on your point of view) with the comment. It’s difficult to interpret the Kronberg quote as a slip of the tongue. It coincided with a weekend report in Der Spiegel magazine which said that Schaeuble’s ministry was considering taking legal action against the ECB if it resorted to “helicopter money”. The report, citing anonymous officials around Schaeuble, was denied by a ministry spokesman. But the message to Frankfurt had been sent.

What is behind this rhetorical escalation? It appears to be tied to growing concerns in Berlin about the knock-on effects of rock-bottom interest rates on pensioners. Another article in Der Spiegel said Chancellor Angela Merkel and Bavarian leader Horst Seehofer, worried about rising risks of “Altersarmut” (poverty among the elderly), are planning to make more generous pensions a key promise in the 2017 election campaign. The fear is that the AfD could seize on the issue of pensions to build on their recent gains. Suddenly, it seems, ECB policy has become a major political risk for the governing parties. Hours before Schaeuble let loose in Kronberg, his cabinet colleague, Economy Minister Sigmar Gabriel warned during a visit to Vienna that ECB policies were hitting the “little people”.

But does the German government’s criticism of the ECB help? Six German economists argue in an opinion piece published by the Brussels-based Bruegel think-tank and in the Frankfurter Allgemeine Zeitung on Sunday that it is incumbent on people like Schaeuble to offer alternative policies to get Europe’s economy back on track if they believe monetary policy has no role. “What would happen if the ECB failed to respond to the excessively low inflation and the weak economy? And what economic policy would be suitable under the current circumstances, if not monetary policy?” they say. “It is not sufficient to merely criticise and say “no”.

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