When it comes to Mario Draghi’s relationship with Germany’s notoriously fiscally (and monetarily) conservative public, it tends to be a love-hate affair. Actually, scrap the love part.
Back in March 2016, when the ECB cut rates and expanded its QE (in an operation that just like Thursday left market’s underwhelmed, and sent the EUR surging), Germany’s press responded not too kindly to Draghi’s monetary largesse with Handelsblatt, in an article titled “The dangerous game with the money of the German savers”, provided a metaphorical rendering of what is happening in Europe as follows:
The German magazine also painted an oddly accurate caricature of the man behind Europe’s monetary lunacy:
Fast forward three and a half years later, when Mario Draghi, one foot out of the ECB’s Frankfurt HQ on his way to retirement, doubled down in what appeared to be the final push in European monetary policy, when the central banker cut interest rates deeper into negative territory and promised bond purchases with no end-date to push borrowing costs even lower.
The fact that it was left open-ended (or until the ECB starts raising rates) was perhaps the biggest takeaway, and as Deutsche Bank’s Jim Reid noted “QE infinity is back if that’s not an oxymoron.” That said, there were some complications when Bloomberg reported that Europe’s top central bankers – the French, German and Dutch governors – all opposed more QE, as did Coeure and Lautenschlaeger and a couple of others. “So this was a contentious move and rightly so.”
But an even bigger surprise was Draghi’s veiled admission that the ECB is now out of ammo and that to boost the economy, Europe will need fiscal stimulus, i.e., issue more debt. Specifically, Draghi referred being “very concerned about the pension industry” and also suggested that the answer to speeding up positive side effects was fiscal policy. As Reid concluded, “it’s hard to therefore get away from feeling that even the ECB feel we’re nearing the end game in terms of the limits of monetary policy. Something that has been obvious to the outside world for sometime.”
So just how easy will it be for the ECB – and its new head Christine Lagarde – to force Europe into taking the politically unpopular move of issuing (much) more debt (even with the ECB’s MMT-esque guarantee to monetize it) to support the economy. Well, aside from the fact that Lagarde will face a major revolt from the ECB hawks from day one, especially if she intends to pursue a continuation of Draghi’s policies…
— jeroen blokland (@jsblokland) September 13, 2019
… there are those who bizarrely believe that Europe is finally on a winning path. One among them is the traditionally skeptical Bill Blain who earlier today wrote that “Europe is heading down a new road – the Fiscal super-highway. Draghi confirmed it when he called it: “Time for Fiscal Policy to take Charge”, challenging governments with “fiscal space to act in an effective and timely manner.” It’s was a perfect set up for his successor, Christine Legarde, who has but one role: to ensure the politics of Europe fall in with fiscal stimulus. And just in case anyone thinks a fiscal boost = debt crisis, then the resumed QE program should pretty much ensure the ECB has the ammunition to cover any weakness in European sovereign bonds.”
Strip it to the core, and you could argue all that’s really happening is the ECB printing lots of money for European states to fiscally juice their economies….. As I said it clever!
Clever yes, but simple? For the answer we once again go to the only nation that matters when it comes to the monetary and fiscal future of Europe, namely Germany, where years after the 2016 slam of Draghi, we again find that the mood is less than enthusiastic.
And nowhere was this mood represented better than by Germany’s most popular tabloid, Bild, which on Friday accused Draghi of “sucking dry” the bank accounts of Germany’s savers, a day after the ECB cut interest rates deeper into negative territory. Next to a Dracula photomontage of Draghi, Bild’s headline read: “Count Draghila is sucking our accounts dry.”
Just like in 2016, the ECB’s “open-ended” stimulus immediately fueled concerns among frugal Germans (perhaps the only nation in Europe that actually saves their money), who have complained for years that the ECB’s low interest rates are denying them a decent rate of return on their savings.
“The horror for German savers goes on and on,” Bild wrote.
As Reuters notes, this wasn’t the first time the tabloid had taken aim at Draghi: during the euro zone crisis, Bild gifted the Italian a spiked Prussian helmet from 1871 to show its confidence that he would adhere to German-style discipline. Draghi put the helmet on a shelf in his office (for those wondering, Draghi made a mockery of German-style discipline by unleashing an unprecedented monetary easing).
Voicing Germans’ anger, Helmut Schleweis, president of Germany’s powerful savings banks association, said the ECB’s latest policy package “does more harm than good”.
Even Germany Finance Minister Olaf Scholz sought to calm savers worried ahead of Thursday’s ECB meeting.
“Most contracts that customers have with their banks do not currently allow such penalty rates, so the problem is not acute,” Scholz said. “Banks’ boards are wise enough to grasp what they would trigger with such penalty rates.”
Which begs the question: if the ECB’s move is voided by banks’ charters at the depositor level where monetary policy is meant to have the most impact, just why did the central bank do what it did (if not to crush Europe’s banking system)?
The answer, it appears, is that very soon Germany’s hate toward the ECB will only be magnified because as Joachim Wuermeling, a board member of Germany’s Bundesbank said: “Banks could soon pass on lower interest rates to even more customers,” Wuermeling told Focus magazine. Nobody should be surprised if banks demanded higher fees and were mulling negative interest rates, Wuermeling said. “It may be necessary from a business and banking supervisory point of view,” he added.
The irony, of course, is that despite being the biggest European economy, its opposition to the ECB’s latest monetary lunacy was lost amid demands for more ECB handouts by such nations as Italy and Spain, which – tragically – now appear to control Europe’s fate. Germany wasn’t alone: the new Austrian National Bank Governor Robert Holzmann, who also sits on the ECB’s policymaking Council, said the ECB’s policy met “pushback” at a meeting this week.
Asked whether the new measures were a mistake, Holzmann, who has a seat on the ECB Governing Board, told Bloomberg TV: “I’m sure this idea crossed the mind of some people and it definitely crossed my mind.”
“Some people” like the entire German population. So when betting the house on Europe’s “inevitable” fiscal stimulus ushered in by an amicable reaction to the ECB strongarming the entire continent into doing the bidding of a few unelected bankers, our advice is… don’t: Germany will never agree; it also the reason why fiscal stimulus has never worked in Europe, and why politicians have always punted to the ECB when it came to more stimulus. This time won’t be different.