EU Market Insight: Casino Royale vs Thrifty Germans
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Since Mario Draghi and his ECB Governing Council fellows cut rates last month, added corporate debt to their now €80 billion-a-month bond-purchasing spree and schemed a new long-term loan program for banks, there have been tensions in the European air.
A war of words erupted ahead of the ECB rate-setting meeting next week between conservative German politicians, bankers and insurers on one side and defenders of independent central bank decision-making process. Even heavyweights like all-powerful German Finance Minister Wolfgang Schäuble and BundesBank President Jens Weidmann, who is otherwise very restrained in his support for the ECB's easy-money policies, crossed swords.
Schäuble said that record low and even negative interest rates were creating "extraordinary problems" for German banks, insurers, pension funds and savers, risking public support for European integration and even supporting political extremism in Europe.
"I said to Mario Draghi ... be very proud: you can attribute 50 per cent of the results of a party that seems to be new and successful in Germany to the design of this policy," Schäuble revealed his feelings last week, although he toned down his words on Friday.
While reserved Weidmann was forced to defend the central bank's independence, Draghi himself poured more oil onto the flames of the heated discussion, calling "helicopter money" – handing cash directly to euro zone citizens to spur inflation – a "very interesting" notion.
Weidmann's Dutch colleague Klaas Knot, who is also one of the more critical ECB members joined his German counterpart appealing for "patience and reality" over the ECB's easing programs. Nevertheless, Knot said in March that the ECB is reaching the outer limits of its policies, and a further expansion of its bond-buying program could raise legal and financial-stability concerns. He added last week that while the ECB was still operating legally, "helicopter money" is outside its mandate.
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