Rising Tensions between the European Central Bank and the Bundesbank

On March 26, 2012, the American Institute for Contemporary German Studies (AICGS) hosted special guest Mr. David Marsh. In a round-table moderated byAICGS Senior Fellow and N24 Washington correspondent Alexander Privitera, Mr. Marsh discussed the rising tensions between the European Central Bank (ECB) and the Bundesbank and what to expect in the coming months.

Marsh placed the exchange between the Bundesbank and ECB in the broader context of Europe’s monetary situation, pointing out that the money provided to banks by the ECB remains in those banks, reflecting a low demand for money in the eurozone. From Marsh’s perspective, this highlights the European Monetary Union’s (EMU) continued financial difficulties, and suggests that the ECB should not yet reign in its generous monetary policy.

Nevertheless, the Bundesbank’s letter places increased pressure on the ECB to reverse its current policy and concentrate on controlling inflation, implying greater support for the Bundesbank’s more austerity-driven approach. According to Marsh, this actually benefits ECB president Mario Draghi. By demonstrating that support for Draghi’s monetary policy is strictly finite, the Bundesbank has provided Draghi with additional political capital in negotiating settlements with Europe’s various central bankers and politicians, allowing him to leverage the Bundesbank’s position to win greater support for his policies in the short term.

Therefore, Marsh described the conflict between the two central banks as “an exaggerated row,” which will ultimately benefit the ECB in pursuing a generous monetary policy to alleviate the woes of Europe’s “melancholy” monetary union.

Mr. Marsh is Co-Chairman of the Official Monetary and Financial Institutions Forum (OMFIF) and Senior Advisor to London-based asset management company Soditic CBIP LLP. He is also chairman of management consultancy SCCO International. Previously, he worked for City merchant bank Robert Fleming, corporate finance boutique Hawkpoint, and German management consultancy Droege. He worked for the Financial Times between 1978 and 1995, including in France and Germany, becoming European editor.

This discussion was moderated by AICGS Senior Fellow and N24 Washington Correspondent Alexander Privitera.

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Kimberly Frank

March 26, 2012