Why the ECB had to clarify it caters for the entire Eurozone not just Germany?

European Parliament. Committee on Economic and Monetary Affairs (ECON). Monetary Dialogue with the President of the European Central Bank Mario Draghi (on the left). Roberto Gualtiery (S&D, IT), Committee Chair accompanies Draghi to the meeting room. Copyright:  European Union 2016 – Source : EP. City: Brussels. Event Date: 15/02/2016.

Last Thursday morning this newspaper concluded that the “only EU institution with true European motives and vision remains the European Central Bank of Mario Draghi”. Just some hours later in that Thursday afternoon the European Sting was confirmed one hundred percent by Mario Draghi, the President of ECB, who said that “We have a mandate to pursue price stability for the whole of the Eurozone, not only for Germany. This mandate is established by the Treaty, by European law. We obey the law, not the politicians, because we are independent, as stated by the law”. Draghi was speaking at the press conference after the regular meeting of ECB’s Governing Council.

This is a major step forward for ECB, not because Draghi said so but because this statement was unanimously backed by the central bank’s Governing Council. Even the great adversary of Draghi, Jens Weidmann, Governor of the German central bank, the Bundesbank, and member of ECB’s Governing Council had supported the Italian about the central bank’s independent role. Two weeks ago Weidmann had criticized his compatriots who had been accusing Draghi of favoring the highly indebted member states of the Eurozone with his zero interest rates policies. Let’s take one thing at a time.

ECB’s independent role

It was a revelation to watch Weidmann – in an interview to Financial Times online service on 12 April – defending Draghi’s expansionary monetary policy, under which the ECB, among other things, has zeroed interest rates. The Governor of Bundesbank has been opposing for years Draghi’s expanding monetary policy into the capital market, with purchases of large quantities of government bonds. Last month, the ECB said it will extend as from June this practice to corporate bonds too, increasing its monthly purchases of bonds to €80 billion.

Weidmann however, aligned himself with Draghi, when a number of conservative German politicians raised the tone of criticism against ECB, about its very low interest rates policy. It was Wolfgang Schäuble, the German minister for Finance who has started criticizing the ECB, when the central bank’s Governing Council decided last year to pursue a truly quantitative easing policy and reduce its basic interest rates.

Rejecting political interference

Schäuble however, recently decided to cross the Rubicon, when in mid March the ECB Governing Council lowered the basic interest rate by 5 basis points to a straight 0.00%. The German minister for Finance actually accused Mario Draghi and the ECB, as being responsible for half the electoral influence of the eurosceptic, right wing German political party Alternative für Deutschland, AfD.

He explained that now the bank deposits of the German savers yield nothing, and the pension funds and the insurance companies have a difficult time in honoring their obligations. Presumably, this development had political side effects, strengthening the eurosceptic political forces. A number of conservative German politicians in their turn pointed a finger at Draghi and the ECB for undercutting the well being of Germans.

A central bank just for the Germans?

The fact is that over the past fifteen years Germany has hoarded more that €1.5 trillion in financial reserves from trade surpluses. This makes Germany the major lender for her euro area partners. As a result, this country has a very good reason to press for higher interest rates. At the same time, most of the other euro area countries are net borrowers and some of them are actually over indebted. In short, the vast majority of the Eurozone countries would prefer lower interest rates, so as the servicing of their debt to leave some room for growth spending. As a result, there is a conflict of interests between Germany and the rest of the Eurozone.

Balanced policies

All along the past six years though, after the 2008-2010 financial crisis, the ECB tried to balance those opposing interests. It didn’t zero its rates right after the crisis broke out, as all the other major central banks of the world did. It took a rather too long time for the ECB to start cautiously reducing its basic rate. Many financial analysts have criticized the ECB about its anti-crisis measures (cheap and abundant money), and most of them agreed that it ‘was too little too late’.

The ECB kept its basic interests rate above the zero line till 10 March 2016, obviously also minding the needs of the German saver. On that date however, the central bank, hard-pressed by the realities of a too low inflation rate and an always stagnating Eurozone economy, was obliged to zero its basic rate. Yet again it didn’t do it to protect the over indebted countries, but because it had to, since inflation had reached the dangerous deflation region.

Fighting deflation

The obvious target is to fight the very low inflation, which threatens to draw the European economy into a vicious cycle of falling prices and ultimately lead to a new crisis. By the same token, the low cost money is supposed to help all and every Eurozone government and the private sector, to start investing again, and possibly bring the economy to a virtuous path of perceptible and sustainable growth.

Some Germans though don’t see it this way. A large part of the population and consequently many conservative politicians and more so the right wing, Eurosceptic AfD party, altogether accuse the European Union about not catering just for their country. Obviously, they want the Union to primarily serve Berlin’s interests.

Merkel v Schäuble

Fortunately, not the entire German political elite think in this way. A shining example is the German Chancellor Angela Merkel, who is rather driven by broader European motives, than by narrow nationalistic interests. On many occasions, Merkel has supported relaxed monetary policies and the cheap money lines of ECB, against the attacks of her No2 in government, the orthodox Finance minister Wolfgang Schäuble.

It seems then that this time also, Merkel is of the same opinion. Last Friday 22 April a Chancellery spokesman denied that Merkel conferred with Weidmann about ‘some’ German politicians, who are overdoing it in criticizing ECB’s zero interest rate decision. The financial daily ‘Handelsblatt’ had published this information without citing a source. This is not unusual for this German daily. In any case, Weidmann didn’t need encouragement by the Chancellor to defend ECB’s independence.

Defending the independence

As mentioned above ten days earlier, Weidmann had defended ECB and Mario Draghi in that FT interview. He had commented, “It’s not surprising for politicians to have opinions on monetary policy, but we are independent,” and then he added, “The ECB has to deliver on its price stability mandate and thus an expansionary monetary policy stance is appropriate at this juncture regardless of different views about specific measures.”

In any case, last Thursday afternoon, Draghi closed the issue by observing that Germany is not the only Eurozone member state. There is more to it though. Earlier last week the ECB had decided to purchase European Financial Stability Facility (EFSF) bonds held by the Greek commercial banks, in order to support their liquidity with low cost financing. And that is to be realized, without Athens having concluded an agreement with its creditors, a condition that Draghi himself had set as a prerequisite for the inclusion of the Greek banks in the quantitative easing program.

Supporting Greece

Yet, the ECB last week included the four systemic Greek banks in its asset purchases program, presumably because the ECB is confident that Greece will conclude sooner or later an agreement with her creditors. It is also an indication that the ECB wants to underline Europe’s soft stance vis-à-vis Greece, in clear distinction from IMF’s and Germany’s tough positions. The Greek banks hold a round sum of €37.5 billion in EFSF bonds, a fact that means they can count on additional liquidity of around €18 billion over the next months. This will be a great help to the crisis stricken country, coming directly from the ECB.

All in all, the ECB has emerged as a truly European institution, with its carefully balanced policies. As Draghi has repeatedly stressed, the goal is that ECB’s quantitative easing measures should be passing through and be felt in all member states.