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09/12/2016

Germany frowns as ECB prepares for new bond-buying scheme

Euro & Finance

Germany frowns as ECB prepares for new bond-buying scheme

The headquarters of the European Central Bank in Frankfurt am Main, Germany.

[Kiefer./Flickr]

With the European Central Bank (ECB) expected to announce a new bond-buying programme on Thursday (22 January), experts in Germany are warning of falling prices and ebbing investment, while the government attempts to distance itself from the upcoming ECB decision. EurActiv Germany reports.

A new bond-buying plan, expected to be adopted by the European Central Bank (ECB) this Thursday (22 January), is meant to boost the eurozone’s economy by motivating banks to shed their bonds and issue more credit for the economy.

But much criticism is coming from Germany, where experts argue the new measure is likely to ruin the eurozone’s chances of recovery from the debt crisis.

Pressure off Italy and France

If the new plan is implemented, it would take the pressure off Italy and France to carry out reforms and practice austerity amid the ongoing debt crisis, warns economic analyst Lars Feld, who is on the German government’s Council of Experts for economic policy.

“Without reforms, Italy and France will continue to struggle along, which has negative effects on our exports,” Feld told Bild. The analyst also said extending expansionary monetary policy will only put a renewed burden on those sticking to austerity.

Observers already assume the ECB will approve a billion-euro bond-buying programme for the eurozone, similar to the strategy used by the United States Federal Reserve. Hopes are high that the move will boost the economy and prevent large-scale deflationary drops in prices, which would lead to lower salaries and dwindling investments.

Last week, German Chancellor Angela Merkel and Federal Finance Minister Wolfgang Schäuble met with ECB chief Mario Draghi in Berlin.

Various media sources reported that Draghi presented his bond-buying programme during the meeting, with Der Spiegel saying he had hoped to make the measure attractive to the Germans by taking this initiative.

German government spokesman Steffen Seibert only confirmed on Monday (19 January) that the meeting took place, “just as there regularly are confidential and informal meetings between them.” But he said he could not make any comment on the content of the meeting.

“You know that our position, represented internally and outside, is that the European Central Bank shall reach its monetary policy decisions independently,” Seibert said.

Low exchange rate

Martin Wansleben, CEO of the German Chamber of Commerce and Industry (DIHK) is concerned over an impending flood of money.

“The markets have already reacted,” Wansleben told Reuters news agency. “The low euro exchange rate is also a reaction to the ECB’s planned bond-buying scheme.”

This facilitates exports, for Germany and above all for crisis countries, which produce more price-sensitive bulk goods, the DIHK chief pointed out. But on the other hand, “the low exchange rate also comes at a price: sectors that require many materials and preparations abroad will suffer,” Wansleben warned.

There is also a big threat that other countries will react to the euro’s weakness, he continued. “The United States may now decide to postpone its increase in interest rates, for example, so as not to lose competitiveness compared to Europe. If this occurs, there is a risk of a spiral of loose money, at the end of which everyone will lose out.”

German banks are strongly opposed to the measure. “The ECB is prematurely firing its last bullets. The instrument of bond-buying should be reserved for economic emergency conditions,” the Deutscher Kreditwirtschaft (DK), a group of numerous German bank associations, said in a statement on Tuesday (20 January).

At the headquarters of the German stock exchange operator Deutsche Börse on Monday (19 January), the Chancellor said she is practicing the necessary restraint opposite the ECB, which is an independent institution.

Merkel: ECB move no excuse to postpone reforms

But at the same, Merkel said any move by the ECB to buy government bonds with new money should not be used as an excuse to put such reforms on the back burner. Such reforms are vital to improving competitiveness, she explained.

“It must be avoided that any action taken by the ECB in any respect whatsoever could result in the impression that what needs to be done in the fiscal and competitive spheres could be pushed into the background,” the centre-right Chancellor commented. One cannot replace the other, she said. Merkel indicated her responsibility for the political side, emphasising that pressures to improve competitiveness in Europe must remain intact.

German Finance Minister Schäuble, on the other hand, is demonstratively taking a backseat. “The monetary policy decisions are made by the ECB,” the centre-right politician said on Tuesday in New Delhi. Structural reforms and a sustainable financial policy are indispensable in euro area countries, he emphasised.

Schäuble also made it clear that he does not see a threat of deflation in Germany and Europe.

In December, living costs in the eurozone decreased for the first time in more than five years, by 0.2%. Many analysts are concerned that falling prices and dwindling investments could result. But in Germany, consumption is strong, a condition Schäuble said works against deflation.

Background

The European Central Bank agreed on 6 September, 2012 to launch a potentially unlimited bond-buying programme to lower struggling eurozone countries' borrowing costs and draw a line under the debt crisis.

ECB President Mario Draghi said the new plan, aimed at the secondary market, would address bond market distortions and "unfounded" fears of investors about the survival of the euro.

The German Central Bank (Bundesbank) is opposed to bond-buying, saying it is akin to bailing out states.

Draghi said the ECB would only help countries that signed up to and implemented strict policy conditions, with the eurozone's rescue fund also buying their bonds, and preferably with the IMF involved in designing and monitoring the conditions.

Read more here.

Further Reading