Who'd have thunk it ?? A German offers his support to Mario Draghi .....

Wednesday 13th April 2016

Who'd have thunk it ?? A German offers his support to Mario Draghi .....

ref :- "Bundesbank chief attacks Draghi critics" , The Financial Times , Interview

Not just any old German either .... this supporter is none other than Bundesbank president Jens Weidmann. It's not as though Mr Weidmann has been uncritical of the ECB's aggressive monetary easing in the past, so his words do come as something as a surprise. But as boss of Germany's central bank it's only right that he should be able to offer his input into the decision-making process, even if his views have ultimately been overridden. Credit to him therefore for being "the bigger man" and reminding his countryman that, even if you don't agree with those decisions, central banks must be independent and free from outside interference, particularly from politicians. Ah, if only it could be so.....

Still, in principle he's right ..... and front and centre in his mind must be Germany's abrasive Finance Minister Wolfgang Schauble, who has been amongst the most vociferous critics of ultra-low / negative interest rates. At heart, Mr Weidmann isn't too fond of them either but he is at least able to see a broader picture than many politicians in his homeland driven by a different agenda. Whilst he may not agree with the extent of the ECB's measures, he points out that at a time of low growth and deflationary concerns a generally expansionist monetary policy is appropriate. Germany may be rocking along pretty well but like it or not the ECB's mandate must take into account the Eurozone as a whole  --  which is of course what all nations signed up for when they adopted the Euro in the first place. Yes, negative rates are a problem for savers but what about the large demographic that will benefit from such a regime ? In other words, you've got take the MACRO view ......

We've often touched upon the growing doubts over the efficacy of negative rates, and whether they really do encourage the kind of consumer spending that will promote growth and some welcome upward moves in prices. But this issue of savers is key, and a classic example of a clash between politics and economics that can result in an infringement of central bank independence. Mr Schauble has put half the blame for the recent surge in support for Germany's right-wing AfD party down to the problems faced by savers and the ECB's easy monetary policies. From a distance, and given the uproar created by the country's ultra-accommodative stance towards immigration, this seems to be stretching things more than a little but there's no doubt that it's a view gaining in popularity.

Mr Weidmann was also at pains to play down the tensions between the Eurozone and the International Monetary Fund over the Greek crisis, which will raise a few eyebrows amongst those who have become used to viewing Germany and the IMF at diametrically opposite ends of the spectrum on this issue. As it stands at the moment, the IMF is still insisting that Greece is offered some measure of debt relief, a move that Germany opposes and one that would automatically impose losses on creditors, Germany more than most. Instead he chose to concentrate on whether Greece is capable of the required structural reforms necessary to get back to fiscal surplus. All one can say about that is that if he is sounding relatively sanguine about the debt burden all of a sudden, then many of his countrymen aren't.

It seems to us that Mr Weidmann's intention was to fire a shot across the bows of political interference, since he would find it hard to conceal his own misgivings over ECB policy even if he wanted to. He's quoted as saying that the ECB easing package in March should have been "less aggressive", and he clearly has concerns that the expanded bond-buying programme (QE) might have the effect of redistributing fiscal risks throughout the Eurozone, something that is not part of the ECB's remit. Nevertheless, he did manage to mount a defence of the general design of the QE package, although in the circumstances cynics might argue that it all sounds a little half-hearted. They might also point out that Mr Weidmann made no mention of the huge benefits to Germany's manufacturing and export-based economy derived from the historically weak Euro, in part engineered by easy monetary policy  --  unsurprisingly, German officials are a little coy on that front. Whatever, we're sure that played no part in the conciliatory tone of the FT interview (right?).

It will fascinating to see if the Bundesbank boss can maintain his newly-supportive stance. The pressure is on the ECB to ease further, whilst the Greek impasse is threatening to get really ugly once again. It may turn out that he's happy to support Mr Draghi on the principle on central bank independence from politicians,  but as for going along with an ever-easing monetary policy ..... well, that may prove to be another matter entirely.

***  Mr Weidmann did touch on another possible form of monetary easing  : so-called "helicopter drops" . This essentially entails distributing cash directly to the population. We've not commented much on this in the past since it would seem such an off-the-wall strategy that it's highly unlikely to be implemented  --  unless of course you're an uber-rich oil state, for example (remember them?). Perhaps we've dismissed it too readily. It is discussed at least, and by some pretty important figures ..... well , Mr Weidmann for one. Anyway, his view is that as a step into the unknown it would cause huge excitement amongst economic academics, but as a policy tool it would be extremely dangerous. That's a view that we would agree with entirely ..... and then some.