Relations between Germany and the ECB have 'soured to the point of curdling'

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Relations between the government of Europe’s biggest economy, Germany, and Europe’s most powerful financial institution, the European Central Bank, have soured to the point of curdling.

The latest volley of barbed remarks came from Germany’s dour Finance Minister Wolfgang Schäuble, who has never been one to mince his words. Speaking at an awards ceremony outside Frankfurt on April 8, he told the audience that the stellar rise of right-wing populist Alternative für Deutschland party was due in large part to the ECB’s loose monetary policy.

“I told Mario Draghi … you can be very proud,” according to a report by a Dow Jones journalist who was present.

Schäuble’s off-the-cuff remarks set in motion a flurry of caustic statements from other conservative German politicians, with the lion’s share of the ire reserved for the ECB’s negative interest rate policy.

“Mario Draghi’s policies have led to a massive loss of credibility of the ECB,”said the deputy head of the CDU parliamentary group, Hans-Peter Friedrich, who also called for Draghi to be replaced by a German when the Italian completes his term, in 2019. “The next ECB Chief must be a German, who feels bound to the German Bundesbank’s tradition of monetary stability.”

Friedrich’s sentiments were echoed by the CSU foreign policy expert and member of the Bundestag Hans-Peter Uhl. “We cannot afford another Draghi,” he said. “We need to place a key German financial specialist at the head of the ECB.”

As the German daily Handelsblatt notes, the latest exchange marks a new low for Germany’s policymakers in their relations with the Frankfurt-based ECB. The main trigger for the latest storm of protest was Draghi’s praise last month for the idea of “helicopter money” – showering citizens with newly created money.

For a country that has traditionally prided itself on its fiscal rectitude and which less than a century ago lived through one of the worst recorded episodes of hyperinflation, the prospect of handing out free money, created out of nothing, to Eurozone citizens was just too much to bear.

Although the ECB has since backtracked on the idea of helicopter money —publicly at least — its unbridled enthusiasm for negative interest rates has probably already done enough damage, threatening to upend banking’s centuries-old model of safeguarding deposits and charging interest on loans.

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Many German banks are already feeling the pinch. Germany’s biggest bank, Deutsche, has made headlines for a string of huge losses as well as massive exposure to risky derivatives. It also faces the prospect of costly lawsuits over its role in the manipulation of the London “fix” price for gold and silver. As if that were not enough, it has to find a way of turning a profit with below-zero interest rates, as do all other German — and for that matter, Eurozone — banks.

If the ECB’s flirtation with negative interest rates becomes a serious affair, banks — particularly the smaller ones — will begin falling like flies.

“We can cope with the current interest-rate environment or even a bit lower,” said Gerrit Zalm, chief executive officer of ABN Amro Group NV, in an interview in Shanghai last week. “But if we were really going into the very negative interest-rate environment, a lot of banks including us will have a difficult period.”

Zalm’s comments were made in early March. Since then Draghi has lowered the deposit rate on money parked at the ECB from -0.3% to -0.4%. He also cut the main refinancing rate by 5 basis points to 0%.

It’s not just German banks that are feeling the pain. As the Wall Street Journalrecently reported, German life insurers are caught in a pinch that could eventually “threaten their survival”, as regulators force them to boost capital levels at the same time that low rates make it exceedingly difficult to turn a profit from their investments.

“What is dangerous is that the return on many investments is no longer reflective of the underlying risk involved,” said Mr. von Bomhard, CEO of Munich Re . “Many investors feel forced into taking higher risks.”

So concerned are German regulators about the impact of negative interest rates that they have said they can only be sure the life insurance sector is safe through 2018. Even today, half the industry would be short of capital without the help of “special measures.”

The problem is not just keeping the sector alive; it’s providing enough returns to keep Germany’s burgeoning ranks of pensioners in the lifestyles they’ve grown accustomed to. Many Germans, especially core conservative voters, have plowed their saving in annuities and other plans that invest in low-risk government debt. But thanks to the low rates, those investments aren’t appreciating. According to a new report by public broadcaster WDR, almost half of workers who retire in 2030 will receive pensions below the minimum social welfare level.

Crumbling entitlements coupled with a barren investment landscape, largely thanks to the ECB, have emerged as prime political fodder, particularly for the upstart AfD. SDP lawmaker Manfred Zoellmer: “The AfD gained strength with the refugee crisis, but you can expect that they’ll make the expropriation of the people through Europe the next big issue.”

If votes are on the line, you can expect politicians to listen and at the very least pretend to kick up a fuss. Germany has already opposed a number of ECB initiatives. When Draghi announced last month that it was considering pulling the plug on the €500 note, the German Bundesbank hit back with a scathing critique [read: Freedom Always Dies Bit by Bit”: Bundesbank Takes Sides in War on Cash].

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The attacks on the ECB have gotten so loud that the Bundesbank moved to defend ECB policy, arguing that weak price pressures in the currency area demand an expansionary monetary policy stance, and it warned against undermining the central bank’s jealously guarded independence. A number of senior bankers also spoke up in Draghi’s defense.

But many of Germany’s conservative politicians seem unmoved, especially now that a new political party is on the scene threatening to take their cushy seats. “It’s the right debate to have to say that we need another interest-rate policy in the mid- to long-term,” said Thomas Schaefer, CDU finance minister for the state of Hesse, home region of the ECB’s Frankfurt headquarters. “The ECB is in a position of independence, but that doesn’t mean it’s untouchable.” Try telling that to Super Mario. 

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