Teutonic Doubts Germany’s Beef with the ECB

It’s a clash of two economic worlds. While they can’t stop it, most of Germany’s top economists are stubbornly opposed to the European Central Bank’s plans to buy government bonds.
Most German economists are sticking with their "no" to quantitative easing.

If it were up to the former ECB chief economist, Jürgen Stark, this Thursday would be just another day at the European Central Bank.

“I would do nothing for the moment,” Mr. Stark told Handelsblatt in an interview. “This debate about the dangers of deflation in the euro zone has been completely exaggerated.”

The ECB isn’t likely to follow Mr. Stark’s advice. Instead Mario Draghi, the ECB’s president, is widely expected to announce one of the central bank’s most ambitious and controversial steps to date: a U.S.-style quantitative easing plan that will involve buying as much as €700 billion of government bonds from the 19 countries that make up the euro currency zone.

The fight between the ‘Latin’ and the ‘German’ models of a currency zone are in full swing on the ECB council. Thomas Mayer, Former chief economist of Deutsche Bank

Mr. Stark is not alone in his opposition to the move. Despite a major public campaign by the ECB over the last few weeks to convince its skeptics, Mr. Stark probably represents the view of a majority of Germany’s top economists, who fear that the ECB is preparing to stretch its mandate beyond the breaking point.

“The fight between the ‘Latin’ and the ‘German’ models of a currency zone are in full swing on the ECB council,” Thomas Mayer, the former chief economist of Deutsche Bank, told WirtschaftsWoche.

Germany is something of an outlier. The ECB’s pending action is widely backed by economists and central bankers in Europe as a necessary step to raise inflation and revive Europe’s economy, even if many doubt whether “QE” will be truly effective. This was summed up by Ewald Nowotny, the head of Austria’s central bank, and one of the more recent converts to Mr. Draghi’s way of thinking.

“Monetary policy is a weak lever, but a necessary if not sufficient condition for an economic upturn. That means, I believe it’s sensible to take monetary-policy measures,” Mr. Nowotny, who was initially skeptical of quantitative easing, told the Austrian newspaper Der Standard earlier this month.

Mr. Stark is not buying it: “Monetary policy long ago crossed the line of what it can achieve to overcome the crisis. An even more expansive monetary policy will not have any effect on the real economy, nor will it quickly push inflation rates upwards.”

This debate is not really new. Mr. Stark was one of two German central bankers who resigned from the European Central Bank back in 2011 in protest after the ECB had launched a smaller bond-buying program that targeted the debt of only a few southern euro zone countries that faced questions over whether they could remain in the euro currency zone at all.

While the 2011 debate was about how to save the euro zone from collapse, the argument over quantitative easing today is a more traditional one that has faced all central banks around the world.

Just what are the limits of monetary policy? What is the best measure of inflation? And is unconventional monetary policy really successful in reviving an economy?

For comparison’s sake, Germany’s opposite number in the United States is probably Richard Fisher, the outspoken president of the Federal Reserve Bank of Dallas who opposed many of the U.S. central bank’s moves into quantitative easing and has called for interest rates in the world’s largest economy to be raised sooner rather than later. In an interview with Handelsblatt last year, Mr. Fisher described himself as “the Bundesbank of the Federal Reserve system.”

The ECB is missing its mandate of price stability and is in the process of losing its most important value: It’s credibility - That makes quantitative easing a necessary evil. Marcel Fratzscher, Head of the Berlin-based economics institute DIW

Jens Weidmann, the president of Germany’s central bank, stands firmly in the conservative or “hawkish” camp of monetary policy guardians. Like Mr. Stark, he says the ECB has reached the limits of what it can do to revive Europe’s economy.

Most German economists are backing Mr. Weidmann. From their perspective, it is now up to Europe’s governments, and not its central banks, to revive the continent’s prospects by implementing far-reaching structural reforms that could encourage businesses to spend more money, raise their prices and hire more people.

“The ECB shouldn’t just be looking at deflation risks, but should also take into account that, as a buyer of government bonds, it will give governments additional incentives to delay structural reforms,” Volcker Wieland, a member of the Council of Economic Experts that advises the government, told WirtschaftsWoche.

Another argument is over inflation. Is the euro zone really at risk of falling into a deflationary spiral?

For Mr. Draghi, the answer is clearly yes. He can point to the euro zone’s consumer prices turning negative in December for the first time since 2009. He can also point to the market’s growing expectations that the ECB is failing to meet its goal, which is to keep inflation closer to 2 percent.

“The ECB is missing its mandate of price stability and is in the process of losing its most important value: It’s credibility,” Marcel Fratzscher, head of the Berlin-based economics institute DIW and one of Mr. Draghi’s few prominent backers in Germany, told WirtschaftsWoche. That makes quantitative easing a “necessary evil,” he added.

But is this really a bad thing? Germany’s conservative economists are not convinced.

Michael Heise, the chief economist of Allianz, a German insurer and financial services company, says the fall in prices is mostly due to two things that are actually good for the euro zone: one is that global oil prices have been cut in half over the past year, which is actually giving consumers more money to spend on things other than petrol. The other is that prices are falling fastest in southern Europe, marking a much-needed readjustment after many of these countries watched their prices rise faster than Europe’s northern countries for nearly a decade.

Probably about a quarter of the euro zone’s members are currently facing deflation, while consumer prices in Germany have stayed positive.

“Excluding a necessary adjustment process in the periphery countries, and the economically beneficial fall in oil prices, the actual inflation rate would be about 1 percent higher than it currently is,” Mr. Heise told WirtschaftsWoche.

And then there’s the argument about the euro. Even if Mr. Draghi doesn’t want to admit it, most economists agree that part of the argument for buying government bonds is to lower the value of the euro. The euro has already fallen from a high of 1.40 dollars to the euro to 1.15 dollars today. Goldman Sachs, the U.S. investment bank, predicts it could fall to 1:1 by 2017.

This may help the euro zone export more stuff to countries outside the currency bloc. But for Germany, which has long managed to be an export power even in the days of a strong deutsche mark, this too is a bad omen.

“The views are divided between those who, like the Bundesbank, believe in a strong currency policy that forces the real economy to adjust, or if you say the real economy can no longer hold on and has to be helped along by a devaluation of the currency,” said Mr. Mayer, the former Deutsche Bank economist.

This debate will surely continue well beyond Thursday.


Christopher Cermak is an editor with the Handelsblatt Global Edition. Material has been compiled from interviews conducted by Jens Münchrath of Handelsblatt, and Angela Hennersdorf, Malte Fischer and Konrad Handschuch of WirtschaftsWoche. To contact the author: [email protected]