Don't expect German criticism of the ECB to die down

BERLIN (Reuters) - If you look at the facts, for Germany to lay into the European Central Bank makes little sense.

Yes, low interest rates are not great for Germans who have squirreled away their savings in traditional bank accounts instead of investing them in real estate or stocks. But this has been offset by inflation that is close to zero.

Yes, the ECB’s loose monetary policies are not ideal for the German economy at the moment. But the bank’s mandate, as Mario Draghi reminded everyone at his news conference on Thursday, is to look at the euro zone, not at individual member states.

And yes, German savings banks and life insurers are suffering. But this has more to do with their flawed business models than with the ECB, which is doing what central banks around the world have been doing for years in an effort to kick-start inflation and push up growth.

So why are politicians in Berlin, led by Finance Minister Wolfgang Schaeuble, crying foul? It’s because their criticism has a lot more to do with politics.

That is why no one should expect the criticism to die down now that Draghi has shot back with a not-so-subtle warning to Berlin that its attacks could end up undermining confidence in current policies, forcing the bank into even bolder steps.

If this wasn’t obvious before, it should be after Chancellor Angela Merkel herself came out on Thursday, hours after Draghi spoke, and declared the German debate over the ECB’s low interest rate policies “legitimate”.

In truth, leading members of her conservative party agreed over a month ago, following three regional elections, to go on the offensive against the ECB and its low rates, numerous officials have told Reuters.

Their analysis was that the Alternative for Germany (AfD), a party that has surged in the polls by tapping into German fears about refugees, had done so well in the votes -- winning between 13 and 24 percent -- because they had seized on Draghi’s polices as well as the migrant issue.


Draghi inadvertently set off a storm in Germany one month earlier by telling the European Parliament that the ECB was considering ditching the 500-euro note over concerns it was becoming the bill of choice for criminals and terrorists.

European Central Bank (ECB) President Mario Draghi speaks during a news conference at the ECB headquarters in Frankfurt, Germany, April 21, 2016. REUTERS/Ralph Orlowski

This was seen by some as an ECB strategy to make it harder to hoard cash. The Bundesbank went so far as to describe the idea as a threat to “freedom”. The AfD was not far behind.

Then on March 10, three days before the German votes, Draghi -- in what some ECB officials have since acknowledged was a mistake -- was asked at a news conference about handing out ‘helicopter money’ to citizens and described the concept as “very interesting”.

A day later, AfD leaders Frauke Petry and Joerg Meuthen went on the offensive with a statement that was shared widely on Facebook and Twitter. “Draghi’s policies are ruining banks, savings and nations in equal measure. Who is going to stop him?” they asked.

Whether this message resonated with voters on March 13 is unclear. But it did unsettle Merkel and her strategists, whose approach until then had been to ignore the AfD.

The message they sent out was clear: criticism of ECB policies was no longer taboo. Schaeuble led the charge, going so far as to hold ECB policy partly responsible for the rise of the AfD.

“On one level this is about domestic politics,” said Henrik Enderlein, director of the Jacques Delors Institute in Berlin.

“Schaueble has picked up on it because politically the time is right and it’s a way to catch the AfD vote.”

Other factors are also at play.

For months Merkel has been eager to put an end to a damaging fight with her Bavarian sister party, the Christian Social Union (CSU), over refugee policy.

Bavaria is home to Germany’s biggest insurers and the CSU has been among Draghi’s toughest critics. By joining the CSU in its criticism, Merkel and her Christian Democrats (CDU) shift the focus from the refugee row and bring the estranged partners closer together again.

“The low rates policy is becoming a bigger concern for Merkel...,” a senior official close to the chancellor said. “I wouldn’t expect Merkel to criticize Draghi in public herself. But she doesn’t have a problem with Schaeuble and others speaking out.”


Merkel said as much in Eindhoven on Thursday, describing the German debate over ECB rates as legitimate, before adding that the criticism did not amount to a violation of the ECB’s independence.

Some economists disagree.

They worry that the rhetoric from Berlin could undermine the effectiveness of the ECB by giving markets the impression that certain policies are off the table because the German government doesn’t like them.

“The most important thing for a central bank is its credibility and this criticism erodes that,” said Marcel Fratzscher, president of the DIW economic institute in Berlin and a former ECB official.

Fratzscher and Enderlein see another problem with the German criticism: it deflects blame to others at a time when Berlin should be taking a closer look at its own policies.

In Eindhoven, Merkel made the point that monetary policy cannot solve all of Europe’s economic problems. “That’s why it is the responsibility of us politicians to do our homework in our area, in economic policy, in structural reform,” she said.

Yet Germany has done very little in the way of structural reforms since Merkel took power a decade ago. And some would argue that Schaeuble’s insistence on a balanced budget at home has contributed to the low growth, low inflation environment that Draghi is trying so desperately to address.

“Instead of criticizing the ECB, Germany should be looking in its own back yard,” said Enderlein.

But with an election due in 2017, the AfD on the rise and the electorate still jittery about the influx of over a million migrants last year, Merkel and her allies appear to have decided that this would not be good politics.

Reporting by Noah Barkin; editing by John Stonestreet