German finance minister Wolfgang Schäuble was forced by Jens Weidmann, president of the powerful Bundesbank, to publicly state that he fully respects the independence of the European Central Bank (ECB) and its decisions, thus ending a week of controversy about the unconventional monetary policies of the ECB. Schäuble had previously stepped up his criticism of the European Central Bank, reportedly saying that central bankers should be told by finance ministers to exit unconventional monetary policies. Schäuble also suggested that the decisions made by Mario Draghi, the president of the ECB, contributed to the rise of the populist party Alternative für Deutschland (AfD) in Germany.
The attack triggered a staunch public defense of the central bank’s recent actions. This time, however, the main defender was Jens Weidmann, himself known for opposing recent monetary policy decisions made by the ECB’s governing council. Weidmann not only defended the independence of the ECB, he also said that its monetary policy stance was appropriate, given the macroeconomic environment. He then proceeded to explain that the debate in Germany is overly focused on the impact of low interest rates on savers—who are suffering because of them—while neglecting the fact that the ECB has to take other factors into account, primarily its mandate of price stability, defined as a rate of inflation close to but below 2 percent. “People are not just savers,” he told the Financial Times, “they are also employees, taxpayers, and debtors, as such benefiting from the low level of interest rates.” It certainly sounded as if Weidmann was not only defending the institution he is part of, but also trying to mend fences with Draghi, with whom he has a troubled relationship. At the very least, Weidmann seems to be trying to regain some political maneuvering room in the governing council of the ECB dominated by central bank governors that have sided with Draghi over recent years, thus leaving Weidmann quite isolated. It is too soon to say whether Weidmann managed to regain some political capital and if he did, it is unclear how he intends to use it. He deserves praise, however, for doing the right thing at the right time. Nobody gains anything by undermining the ECB, especially given the tests Europe faces, not least the danger posed by a possible Brexit or a new flare-up of the never-solved Greek crisis.
It is certainly true that monetary policies are going through a phase of reassessment, in part given their current impact on foreign exchanges. The Bank of Japan’s experiment with negative deposit rates—that should have weakened the yen—has recently triggered a rally of the Japanese currency in foreign exchange markets, the exact opposite of what the central bank intended to achieve. Even the ECB is watching how the euro is gaining strength, despite the latest further loosening of its monetary policy stance. All this is puzzling, even seems to defy logic. After all, while it is true that the Federal Reserve has decided to postpone further interest rate increases, it is far from going into reverse and once again loosening its own monetary policies. The Fed’s likely path is either neutral or tighter while the ECB and other central banks have expanded their program of asset purchases, also known as quantitative easing (QE). One explanation given to this state of affairs is that markets are testing the credibility of central bankers, that is, their ability to follow through on their promises. Against this backdrop the constant sniping against the ECB in Germany has certainly made Draghi’s job so much harder. Since so much about the impact of monetary policies is about communication and credibility, German criticism has probably contributed to force Draghi’s hand into plunging deeper into partially unchartered waters. He had and still has to convince markets that he means what he says and that the ECB is capable of and willing to follow up on its bold announcements. The constant barrage of ECB criticism coming from one of its main stakeholders has proven to be completely counterproductive. Indeed, it doesn’t make Germany look strong and influential, but rather isolated and narrow-minded.
The recent erosion of public support for the Christian Democrats of Chancellor Angela Merkel is clearly having an impact on politicians’ behavior. It is no secret that the popular finance minister has a deep aversion to any form of debt and thinks that easy monetary policies encourage a build-up of public and private debt and eventually lead to higher inflation. It is also an open secret that the German banking sector—in particular its savings banks—is ill-equipped for a prolonged low interest rate environment, given that low interest rates tend to squeeze profit margins of traditional lenders. Such positions are widely held among Germans, and in particular among German conservatives. Since the beginning of the so-called euro crisis the German government and Schäuble in particular tried to place these positions right into the mainstream of European politics. But recent election results across Europe have seriously challenged those attempts. Germany finds itself pushed to the margins of the economic debate, seen by most Europeans partners—as well as by the U.S. administration—as a hurdle to realistic and pragmatic solutions, rather than its chief promoter. At the Spring Meetings of the International Monetary Fund/World Bank Group in Washington, Schäuble must have felt how hard his job has become. Many of his colleagues representing advanced economies and the IMF stressed that unconventional monetary policies are indeed necessary but may prove to be insufficient if countries with fiscal space—Germany—do not increase public spending dramatically to support a weakening global economy. That is the exact opposite of what Schäuble has in mind in order to put the global economy on a sounder footing. It seems that the more popular his positions become in Germany, the more isolated he becomes abroad. If true, that would be a troubling trend. It is not Germany’s traditional role in Europe to be pushed to one extreme. Schäuble, probably the staunchest pro-European member of Merkel’s cabinet, is aware of that. He can still reboot Germany’s role in the EU. After all, both Europe and the transatlantic relationship still need his experience and capacity to think big.
Alexander Privitera is the Executive Director of the European Institute and a Senior Fellow at AICGS.