German political spillovers: ECB’s Draghi resists first attacks by AfD

Last Monday, Mario Draghi, President of the European Central Bank, speaking at the Economic Committee of the European Parliament had the opportunity to test the grounds and familiarize himself with the nature of political climate he may come across after the German elections. He had a heated exchange with the head of the AfD group of European parliamentarians, a former leader of this party. But let’s start from the beginning. On Sunday 24 September Chancellor Angela Merkel succeeded in holding on to the country’s top job, but her powers to set the tunes are gravely compromised. She has repeatedly and effectively backed Draghi’s choices at crucial moments, but the right and Eurosceptic turn of the German voters may impede that. The extreme right wing, almost fascist, aggressively anti-European, chauvinistic, xenophobic and anti-immigration AfD party (Alternative for Germany) entered the country’s federal legislative for the first time, having gained 12.8% of the ballots and 85 seats in the Bundestag (German Federal Parliament). A game changer? Last election also brought again in the Bundestag the FDP, the Free Democrats Party, after a four years absence. This party is a rather Eurosceptic, conservative, nationalistic, right wing and dubbed as pro-business. On the same day the two major parties, the center-right Christian Democrats of the CDU/CSU alliance and the center-left Social Democrats of SPD, jointly lost around 15% of their votes. Those two parties in close cooperation during the past sixty years have defined between them Germany’s position in Europe and, in doing so, have even redrawn the map of the Old Continent. All along those years, 80% of the Germans considered themselves politically as centrists. It seems that this is not like that anymore. Not only the two center-something parties have lost much of their electoral appeal, but they are about to break the tradition of forming between them coalition administrations. They both took Germany out from her economic and political hurdles of the early 2000’s and made her the largest exporter of the planet today. A heavy political cost The task was herculean and, as it turns out, was carried out at a great political cost for the two largest parties. The social-democrats blinked first. Martin Schulz, the new leader of SPD, rushed to declare last Sunday night that his party won’t act any more as a junior partner of CDU/CSU in a Merkel government. Then, the only viable in Parliament administration she can now form is a colorful coalition of…antipodes. This is an eventually tripartite government with CDU/CSU as its main pillar, plus the FDP and the left leaning, pro European and anti-austerity Greens. This mathematically possible but politically incoherent coalition government is dubbed ‘Jamaica’, because the colors of those three groups are black, yellow and green, as the flag of the Caribbean island nation. Under such a combination of opposites, deciding policies may beat even the famed conciliatory abilities of the Chancellor. Full of terms and conditions Already, Christian Lindner, the middle-aged but paying much attention to look boyish, leader of the FDP has claimed for his party and understandably for himself the portfolio of Finance. If this is the case, the incumbent Minister, the renowned Wolfgang Schäuble 75, would have to change post. It’s more or less final the latter will remain in the cabinet at a ministry… close to Finance. Quite predictably then, Lindner, being greatly preoccupied with his looks, will find it difficult to act without the consent of the old wolf, who will continue to authentically represent the deep German business-state interlock. Schäuble also possesses a strong European power network of personal contacts Lindner cannot beat. In any case, even under the leader of FDP, the German Finance ministry’s positions in the two main fronts, budget and Eurozone, will be rather more Schäubleish than less. That’s why Draghi will find it more difficult to sail under stronger adverse wind. He had a first taste of that last Monday in the European Parliament. A right turn Coming back to our introductory remarks, it must be explained first, why the AfD extremists have managed to gain some seats in the European Parliament, before entering the Bundestag. This is due to the electoral system of the EU’s legislative. Every EU country is one big constituency and those who pass the vote threshold are elected. On Monday, 25 September it was the head of the EU Parliamentary group of AfD deputies, who tried to press the President of the ECB. The key issue was central bank’s super relaxed monetary policy that is money printing and zero interest rates. Bernd Lucke, European legislator and former leader of AfD, who was attacked not without good reason as ‘fascist’, repeatedly reprimanded Draghi for his monetary accommodative measures. The core of Lucke’s criticism was that the ECB helps the ‘lazy’ southerners to refinance their debts at low interest rates and at the same time denying any returns to the bank deposits of the Germans. These are the arguments the AfD over exploited to get 12.8% last Sunday and seemingly won’t hesitate to continue on the same direction. Draghi’s answer In any case, Draghi answered in his usual matter of fact way. He used the same arguments as when confronting for many years now Jens Weidmann, the Governor of Bundebank, the German central bank. Germany, under the strong guidance of Schäuble and his ‘protégé’ Weidmann has been opposing all the extraordinary measures which Draghi has introduced so far, initially to save the euro in 2012 and subsequently to support growth and revitalize the dying inflation rate. On the same occasion Draghi reassured the MEPs of the Economic Committee of the European Parliament, including Lucke, that the ECB will continue injecting tens of billions of freshly printed euros every month into Eurozone, and stick to its zero interest rate. So far, the ECB has printed and distributed €2.2 trillion in trying to revive inflation and support growth in all Eurozone, not just in Germany. Now, however, Draghi said there is one more reason to continue on the same line of extraordinary measures. This is the appreciation of the foreign value of the euro, which undermines growth in all member states. According to Reuters, he told the European legislators that, “ample ECB accommodation is still needed because a premature and hasty move could unravel its work…we also know that a very substantial degree of monetary accommodation is still needed for the upward inflation path to materialize… We can’t afford hasty moves…We also have to be sensitive to the danger of not halting a recovery through hasty monetary-policy decision making”. Then, Draghi confronted the new danger, the appreciation of the euro, by saying, ”We still see some uncertainties with respect to the medium-term inflation outlook..Most notably, the recent volatility in the exchange rate represents a source of uncertainty which requires monitoring…We therefore need to be patient and persistent.” The ECB doesn’t blink In conclusion, the Germans and whichever Schäubleistic personality is to head the ministry of Finance, should comprehend –  that the ECB’s answer will be the same to all their denigration of the very low interest rates and new money printing. After last Sunday’s earthquake, Germany may have shifted to the right but the rest of Europe stays where it is, as Draghi underlined. It’s the task of the German mainstream political and economic elites to understand that. If they don’t themselves become more popular, by favoring higher wages, increased incomes for the many and more investments at home, somebody else will do it for them. This has happened before…in 1933