Germany vs. the ECB: an Inconvenient Debate?

The campaign that a number of German officials have mounted against the European Central Bank’s expansionary policy reflects the overwhelming political difficulties facing the eurozone. Meanwhile, many political leaders, particularly in France, desperately hope that the central bank could make up for their declining ability to handle the economy. In the eyes of struggling governments, the institution embodies a much-needed symbol of activism and mastery, amid growing fears that the European Union as a whole is progressively disintegrating. Most European politicians thus defend the ECB’s independence in the face of Germany’s criticism for reasons that actually have little to do with the monetarist creed that underpins the institution.

Their vocal support illustrates not only their commitment to the eurozone’s only stimulus tool but also their reluctance to engage in a direct debate with their German counterparts about the political management of the euro. The ECB has prevented the currency union from falling apart. Meanwhile it has allowed national governments to hide their deep-rooted inability to find a mutually-acceptable solution to the ills of the eurozone, of which mass unemployment and an ailing banking sector are the most urgent symptoms. The ongoing row is weakening this economic status quo even further.

The political impasse notably stems from the opposing kinds of populism that pressure national governments. Even anti-immigration right-wing populism varies greatly from one country to another when it comes to economic issues. Although the Alternative for Germany (AfD) and France’s National Front (FN) share a common hostility towards the single currency, their different economic leanings illustrate the ongoing divergence. The AfD displays a fiscally conservative and relatively pro-market stance while the FN advocates a statist approach, which rests on a French version of Keynesianism. The FN, quite paradoxically, expressed more support for Alexis Tsipras when he became Greece’s prime minister in January 2015 than for the AfD after its recent electoral gains. More generally, while German politicians face a backlash from their ageing population against low interest rates, bailout programmes, and the euro’s debasement, the French public, on the contrary, tends to ask for additional stimulus measures to tackle mass unemployment. In a striking illustration of this dynamic, Germany’s finance minister Wolfgang Schäuble did not hesitate to blame the AfD’s rise on Mario Draghi.

The ECB’s president finds himself in a particularly difficult situation. Aware that the eurozone’s integrity still rests on his shoulders, he nervously invokes his mandate, which merely centres on a 2 percent target for inflation. He thus tries, in the face of outspoken criticism, to justify his ultra-accommodative policy stance as a means to tackle lasting deflationary trends. His political acumen combined with a personal leaning towards monetary activism (of the new-Keynesian type) leads him to adopt a complex approach. While he has followed the steps that the Federal Reserve took years earlier to avoid a 1930s-style depression, he has to cope with a specifically European context of ideological divide along national lines.

Rather than deliberately orientating the ECB’s monetary tools towards specific economic goals, he constantly has to retreat behind the theatrics of monetarism to justify his action. Germany’s monetarism belongs to the strictly conservative type however. Ordoliberalismus cherishes the central bank’s independence just as any other variant of monetarism does, but it conceives of price stability as a merely anti-inflationary doctrine and rejects any kind of deliberate monetary intervention in the economy. Draghi rightly argues that his price stability mandate includes the fight against deflation as well, but this point falls on deaf ears in Germany, all the more so when negative rates are hurting the country’s network of regional banks, life insurance companies, and retirees alike.

Mario Draghi has demonstrated an impressive ability to circumvent the eurozone’s monetary orthodoxy. His monetary programmes have prevented the currency union from falling apart, at a time when capital markets were testing peripheral government bonds in a debilitating way. His monetary remedy has made it possible to manipulate financial markets in a very efficient manner, which has led to the suppression of peripheral bond yields and to the euro’s depreciation. To a more limited extent, it has helped to relax credit conditions across the eurozone and to stabilise bank lending to a portion of the corporate sector after a prolonged contraction. Yet it does little either to alleviate the economic plight of SMEs—which account for 93 percent of Europe’s corporations and provide two thirds of jobs—or to guarantee the euro’s long-term sustainability.

The ECB’s president himself recognises that monetary policy alone cannot solve the eurozone’s array of economic issues. Meanwhile, he keeps proclaiming the monetarist creed according to which the central bank can (and must) lift inflation by means of an ever larger monetary stimulus, until it reaches the 2 percent target. Most Ordoliberals deem this interpretation highly illegitimate and the central bank’s independence to be a rhetorical trick in this particular case. While the ECB’s policy does little to spur national economies, these critics stress the risk of financial and property bubbles, in Germany and elsewhere. Jens Weidmann, the Bundesbank’s president, has felt the need to back Draghi’s independence in the face of these mounting attacks. He displayed a more moderate stance than in the past, which might facilitate his European career and increase his odds for the ECB’s presidency in 2019. Although most ECB watchers understandably view him as an arch-hawk, he nevertheless began as early as 2014 to signal a shift to a somewhat more amenable approach to non-conventional monetary interventions.

Mario Draghi’s exasperation is all the more understandable since he made every effort to allay German fears in the first few years of his tenure. By publicly rebuffing German complaints, he however further undermines the much-needed political debate about the euro’s management in general. In peace time, few institutions, when faced with fierce criticism, can afford to cite their legal right to do whatever they deem appropriate and to point at their critics’ inconsistencies in place of a more convincing argument. As the eurozone’s architects have precisely shaped the ECB according to the Bundesbank’s core principles, of which independence is a mainstay, the current situation seems quite paradoxical. Irony nevertheless remains a poor substitute for debate and presently impedes the search for a more comprehensive solution to Europe’s lasting woes, both economic and political.

Wolfgang Schäuble is spearheading the ongoing campaign against the ECB’s asset purchases and negative interest rates in an acrimonious fashion. While he strives to limit the AfD’s political gains and to support his country’s financial system, he has done little in recent years to gain approval for his inflexible approach outside the borders of Germany. His harsh negotiating techniques and his disregard for ailing economies have undermined Europe’s political debate since the euro crisis erupted. Schäuble’s own shortcomings do not prove his adversaries necessarily right on all counts however; nor do they deprive him from the right to voice his concern if he judges the central bank’s non-conventional policy to be particularly harmful. Central banks should undoubtedly enjoy a great deal of independence in order to work out a reasonable monetary policy, away from the tremors inherent to the political arena. Yet independence does not mean self-righteousness.

Political debate should be allowed to tackle the most sensitive economic and monetary issues. The debate on the euro’s management, like any debate, requires at least two consistent sides to succeed, however. While German officials miss no opportunity to defend their country’s economic interests, a more worrying political pattern has emerged in the eurozone’s other large economies. In France in particular, as bureaucratic circles took on unprecedented political importance over the past decades, most leaders have regarded the single currency as a means to shirk their economic responsibilities. While the euro crisis threatened this ill-advised approach, Mario Draghi’s activism has unexpectedly provided them with a fresh opportunity to back away from the search of a realistic solution to the eurozone’s ills and to indulge instead in elusive ideals such as the so-called ‘transfer union.’ This status quo has just proved unsustainable.