European Affairs

Edit

A Defense of Mario Draghi’s ECB     Print Email

alexanderpriviteraA visibly irritated Mario Draghi has politely, but resolutely rebuffed German critics of the European Central Bank’s ultra-loose monetary policies. The president of the ECB used the press conference following this month’s meeting of the central bank’s governing council to launch a broad defense of the central bank’s independence and the appropriateness of its policies. Among other things Draghi said that he doesn’t take orders from politicians but is only bound by the law and the ECB’s mandate of achieving and maintaining price stability, defined as a rate of inflation below but close to two percent.

Draghi’s words came against the backdrop of an unusually blunt attack against the ECB’s accommodative monetary policies launched by German finance minister Wolfgang Schäuble, who reportedly said that central bankers should be told by their finance ministers to prepare 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 anti-immigrant and anti-euro populist party “Alternative für Deutschland” (AfD) in Germany. Faced with a staunch public defense of the ECB’s policies Schaeuble tried to backpedal. He met with Draghi ahead of the governing council’s meeting on Thursday April 21 and publicly clarified his words, saying that he fully respects the independence of the ECB.

However, the damage was done. The problematic relationship between Germany and the ECB has certainly reached a new low. At the heart of the widespread German frustrations there is a deep misunderstanding of the role of the ECB. Many Germans – and their politicians – still think that the ECB is or should be a Bundesbank writ large. In their eyes monetary policies that are good for Germany always benefit the whole monetary union. Conversely, if they are problematic for their country, they must have a negative impact on the whole Eurozone. In the present context that means that Europeans should share the German concern about the potential negative impact of loose monetary policies on savers.

Many German critics have a particularly biased view of the current ECB president Draghi. His accommodative monetary policies are seen as a sign that the ECB is turning into the Bank of Italy of the nineteen seventies, when the Italian central bank monetized public debts, fueling inflation. They believe that once unconventional monetary policies start, there is no way to stop them, even if the rate of inflation – currently dangerously stuck close to zero - makes a comeback. They argue that public debt levels are so high in some of the bigger countries that the ECB would not have the courage to push interest rates - and therefore - refinancing costs higher in order to contain inflationary pressures. Most of these critics are oblivious to the fact that the ECB is acting in an extremely difficult macro-economic environment and is merely doing what major central banks – the Federal Reserve, the Bank of England, the Bank of Japan, to mention a few – have done before as well, with mixed, but largely positive results. They also fail to give the ECB credit for how successfully it managed to keep inflation at bay in the past.

Most importantly, German critics of the ECB seem to forget that thanks to German insistence, the central bank has one clearly defined mandate, that is, to maintain price stability. It risks its credibility if it does not act when it is failing to fulfill its mandate. If its credibility is jeopardized by the constant sniping from one of its main stakeholders, it is forced to act even more forcefully. The paradox here is that German attacks against the ECB force monetary policies to become more accommodative, the exact opposite of what critics are trying to achieve.

Even worse is the fact that German critics often seem to think that central bank policies should reward or punish governments for their fiscal stance and or they capacity to implement structural reforms. They seem to forget that doing so would undermine the central bank’s independence and openly turn it an unelected political actor with the power to make or break governments. Granted, the borders between monetary policies and politics are sometimes blurry. Central banks play a political role, since monetary policy decisions have a political impact. However, institutionalizing the political role of the ECB would severely undermine the effectiveness of the institution. It would also require a change in the rules that govern its functioning. Would the result of such a process be a more or even less German ECB, I wonder?

Let’s put the evolution of Germany’s relationship with Draghi’s ECB in a different, more historic context. Draghi started with much public praise in Germany, he was even depicted in a popular newspaper wearing a “Pickelhaube,” a Prussian helmet. The love affair did not last very long. His pledge to do whatever it takes to preserve the Eurozone from collapsing in the summer of 2012, was badly received by German public opinion. But most of the German political establishment realized that Draghi moved with the tacit support of Chancellor Angela Merkel. Grudgingly, it accepted the role of the ECB as a firewall. In this phase nobody seriously questioned the German influence on the ECB. Media reports about German dissent within the ECB were perceived by analysts as relevant and often constituted market-moving developments. Draghi very much seemed to take German concerns into account. Indeed, it should be noted that the program known as Outright Monetary Transactions (OMT) which is credited with stopping speculations about an impending breakup of the monetary union, ‘merely’ provided an insurance policy against a sudden breakup, it did not represent active monetary support for any specific weak and fragile euro area economy. To date under OMT not a single asset has been purchased by the central bank. Thus, in late 2012 ‘printing money’ was still something other central banks did, not the ECB. The QE Rubicon had not yet been crossed.

Things became much more complicated when it became obvious that liquidity injections into an undercapitalized banking sector were not sufficient to support credit flows. Inflation was falling fast. The central bank was failing to meet its price stability mandate. Against this backdrop Draghi launched the asset purchase program (APP) in early 2015. The German government could not oppose the program publicly, but it was not pleased with the decision and never fully endorsed it. When APP was recently expanded it became painfully obvious that Berlin’s capacity to indirectly influence and restrict the maneuvering room of the governing council of the ECB had run its course.

The ECB has now fully reasserted its independence as a central bank that is focused on its mandate. It is always hurtful for politicians, - German politicians are no exception - to realize that in the field of monetary policy their influence is and should be limited. For that we have to thank past German leaders. The founding fathers of the ECB, among them the German government of Helmut Kohl and the Bundesbank, insisted on molding the new European institution after the German central bank, strong and independent. That is exactly what the ECB is today, even when its decisions are not liked in some of its member countries. After all, as a European institution, the Frankfurt based Eurotower (ECB HQ building) has to take into account conditions in the whole of the euro area. Its strength is the fact that no one country, neither its government nor its central bank can block or force decisions on its own. As such it is currently the best functioning EU institution. It deserves praise instead of scolding criticism.