How Germany strives to mold ECB’s monetary policy to her interests

European Parliament, ECON Committee meeting, ‘Vote and appointment of a member of the Executive Board of the European Central Bank’. On 13 January 2014, Sabine Lautenschläger (first from right) was approved by the previous EU legislative as an ECB executive. (European Parliament Audiovisual Services, 13/1/2014, ¬© European Union 2014 EP).

Sabine Lautenschläger, a Member of the Executive Board of the European Central Bank and at the same time Vice-Chair of the Supervisory Board of the Single Supervisory Mechanism is in itself a living proof that euro area is a Germanic monetary zone, in reality an extension of the zone of the German mark. According to market sources there is a conflict of interest between formulating monetary policy in ECB’s Executive Board and at the same time supervising the banking industry. Sabine, instead of lying low about this fact, she insists to noisily protect the interests of her country, despite her mandate to impartially care about the interests of all euro area member states.

Last week she overtly tried to impair those mainstream ECB policies which the German government and the Bundesbank (the German central bank) have strongly criticized and tried to block. The German central bank vehemently objected ECB’s decision to loosen up its monetary policy, while the Berlin government strongly opposed the low-interest rate strategy. Sabine doesn’t even recognize the fact that Eurozone suffers of negative inflation, obviously forgetting that in many euro area countries consumer prices keep falling steadily for some years now. Let’s take one thing at a time.

Conflict of interest

On 2 April the prestigious German weekly business magazine ‘Wirtschaftswoche’ published an interview of Sabine Lautenschläger. She bypassed quite superficially the question about the possible conflict of interests involving her responsibility of drawing up monetary policy and simultaneously supervising the banking industry being affected by it. A catch-22 situation may arise if these two roles are performed by one person. Suppose that the monetary policy puzzles the banks and then this same official, under the supervisor’s hat, comes back and reprimands one or more lenders for being badly affected by the monetary policy. In answering that she just said, “I always clarify whether I am speaking as a supervisor or as a monetary policy-maker”.

This antithesis is nothing however compared with her open endeavors to debilitate the mainstream monetary policies of ECB. Of course every member of the central bank’s Executive Board has the right of having his/hers own opinions. But on this level their views and objections should be confined within the walls of the meeting room. Sabine’s position is quite different from the situation of the Bundesbank President Jens Weidmann, the other German who participates in ECB’s Governing Council.

Executive Board and Governing Council

Lautenschläger participates in both those decision-making bodies, the Board and the Council, while Weidmann participates only in the latter. In a way the members of the Council are in a more distant position from ECB’s heart that beats in the Board. It must be mentioned that the Board has just six members compared with the 25 of the Council. In a way the Board is the government of ECB, while the Council is its legislative body. This said, Sabine should have raised her opinions about monetary policy only during a Board meeting, while Weidmann is fairly free to air his objections. It’s him who represents Germany in the ECB as a member of the Council. Sabine’s position in the Board is located in the heart of the central bank, and consequently she is not allowed to openly advertise her objections and stand up for her country.

Cheaper money? Why?

Now let’s see what she said when asked about the function of ECB’s low-interest rates policy. She commented that “The low interest rate environment is certainly a challenge for the banks. On top of that, in particular the German banking sector is marked by strong competitive and price pressure. This means that some business models will drift into a precarious situation over the medium and long-term”. Not a word about the growth effect that the low interest rates may have on the Eurozone economies which are haunted from recession for years now.

This approach falls within the German monetary orthodox ideology, where money doesn’t matter and only hard labor can fuel growth. As if the US, British, Japanese and many other central bank governors who massively use cheap money policies don’t know a thing about economics. She worries about the ‘long term’ effect of the cheap money strategy but she forgets that “in the long run we are all dead”. However, it’s not only ideology that Germany cares for. Being the only Eurozone member state with colossal reserves, this country strives to keep yields on the high side. The huge German savings deposit balances and the immense insurance companies’ assets cry for higher returns. But can the rest of Eurozone pay for them?

Buy government bonds? Oh no!

When it came to the government bond purchasing program that the ECB started in March, Sabine commented that “Given the low-interest rates in the euro area, I have my doubts as to whether the economic effects of the purchase program will be able to reach the desired order of magnitude…” and then she added “… I am absolutely aware of the danger that the low costs of financing alleviate the pressure on governments to consolidate their public budgets and tackle the necessary structural reforms”. Again she campaigns in favor of the austere Germanic economic ideology, in direct contrast of what every other developed country did to overcome the devastating effects of the 2008-2010 financial crisis.

Undoubtedly Germany has managed to place her execs to key positions in all and every European Union institution, at numbers and ranks largely exceeding the weight of country. This author has no data to support this allegation, but the taciturn work and the burgeoning mightiness of Berlin’s economic powers during the past years is now bearing fruits. Sabine Lautenschläger’s case is a strong proof of that.