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ECB Independence, Then and Now

by Bernard Sun Apr 24th, 2016 at 04:28:46 PM EST

This was then.

Spring 2012: the financial crisis that struck four years ago has thrown more people into unemployment and the economy has still not recovered. The ECB is running a tight money policy and the official priority of the Eurozone is to reduce state debt and budget deficits. Greece, Portugal, Spain and Ireland have been subjected to austerity policies, with the understanding that Italy and maybe France may be further down the line.

In France, outgoing president, Nicolas Sarkozy, is running for re-election. It's an uphill battle: unemployment has increased during his term and for those who still have a job, their wages have stagnated or even receded. The economy hasn't recovered to pre-recession levels. Many are calling for the ECB to do more to "support economic growth" in addition to its main mandate to keep inflation in check; Sarkozy eventually joined this choir:

Sarkozy puts role of ECB back on French election agenda -- EUbusiness.com | EU news, business and politics (17 April 2012)

Sarkozy launched the last week of his difficult re-election campaign with a veiled swipe at the independence of the European Central Bank (ECB).

"On the role of the Central Bank in supporting growth, we are also going to open a debate and we will push Europe forward," he told an election rally on Sunday.

"If the Central Bank does not support growth, then we will not have enough growth."

Despite the so-called "Merkozy" alliance, reaction from Berlin was swift:

Germany stresses ECB independence after Sarkozy comments | Reuters  (17 April 2012)

Germany on Monday rebuffed calls by French President Nicolas Sarkozy to extend the mandate of the European Central Bank (ECB) to include supporting economic growth, citing the central bank's independence.

"The German position on the ECB and its independent role is known and is also known in Paris and has been unchanged for a long time," Chancellor Angela Merkel's spokesman Steffen Seibert told reporters.

[Frontpaged - Frank Schnittger]


Of course, the CDU government was also worried by the likely election of François Hollande, who, not only wanted the ECB to support growth but also wowed to challenge the fiscal pact:

French election could spell end of Merkozy alliance | World news | The Guardian (Sunday 22 April 2012)

It is here that Hollande is planning to challenge Merkel most fundamentally - on the policies and strategies that have entrenched German fiscal rigour and austerity as the eurozone's answer to the crisis.

That means seeking to reform the role of the European Central Bank and discussing Merkel's punitive fiscal pact, reluctantly agreed by 25 EU leaders in March and now being ratified. Hollande says that a France under a new political majority in June will not ratify the existing pact. Merkel, by contrast, is racing to get the German Bundestag to endorse the pact by next month.

Just before campaigning closed in France on Friday, Hollande threw down another gauntlet to the Germans and the ECB. The Frankfurt central bank, he said, should help fix the euro crisis by lending directly to eurozone governments rather than supplying cheap credit to banks.

When Hollande eventually replaced Sarkozy in May, he pushed forward, along with Mario Monti and others, on extending the ECB role to tackle the debt crisis, with similar reactions:

Euro-Zone States Discuss Plan to Give ESM Unlimited Funding From ECB - SPIEGEL ONLINE (July 31, 2012)

Leading members of the ECB's governing council support the idea, the report said. But the German government and the German central bank, the Bundesbank, have in the past opposed the move because it could fuel inflation, endanger the ECB's independence and breach European Union treaties that forbid the ECB from financing euro-zone member states.

Germany Opposed to Idea

The plan isn't new. France proposed it last year but Germany and other countries shot it down. But German Chancellor Angela Merkel faces increasing European pressure to drop her Nein and make way for a measure that many hope would end the two-year crisis plaguing the continent.

The German Finance Ministry on Tuesday rejected the plan. A spokesman said the ministry saw no need for an ESM banking license. "And we're not holding talks on this issue."

This is now.

Spring 2016: four years later, Hollande has definitely given up challenging the budgetary orthodoxy and has aligned himself, and the rest of the Eurozone, behind Merkel and Schaüble and the no-deficit, balanced budget, supply side principles. The austerity policies have thrown the EZ economy into morass and quasi deflation, the "Confidence Fairy" notwithstanding.

To fend off the threat of a deflationary spiral, the ECB, under Mario Draghi, has launched a strong quantitative easing program, that eventually lead - predictably enough - to lower interest rates, even negative rates in some places. This is good news to those who are borrowing money, but this is not good news to those who are saving money. And the latter are growing increasingly vocal, particularly (but not only) in Germany. Last month, the Handelsblatt made a cover showing Draghi nonchalantly burning a 100€ note with a headline: "Mario Draghi's dangerous game with the German savers money".

Wolfgang Schaüble, ever so mindful of the ECB independence, expressed a strong unease during the G20 summit in Shangai last February.

Central banks near policy limits but back in focus after G20 meeting - The Globe and Mail

"Monetary policy is extremely accommodative to the point that it may even be counterproductive in terms of negative side effects on banks, policies and growth," German Finance Minister Wolfgang Schaeuble said at the G20 meeting.

"Fiscal as well as monetary policies have reached their limits," he said. "If you want the real economy to grow, there are no shortcuts which avoid reforms."

According to Schaüble, it's the QE and low interest rates that are the causes and not the consequences of anemic growth.

A few weeks ago, Schaüble went even further and took the gloves off:

German criticism of ECB gets louder as politicians say savers are losing out | Reuters

A chorus of conservative German politicians have criticized the European Central Bank for its interest rate policy, which they say is hitting the retirement provisions of ordinary Germans, could lead to asset bubbles and even boost the right-wing.

German Finance Minister Wolfgang Schaeuble partly blamed the ECB's policy for the success of the right-wing Alternative for Germany (AfD) in recent regional elections, which saw it take up to a quarter of votes in a setback to Schaeuble's conservatives, according to the Wall Street Journal.

The newspaper quoted Schaeuble as saying he had told ECB President Mario Draghi: "Be very proud: You can attribute 50 percent of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy." A finance ministry spokesman declined to confirm the comments.

After strangling growth, easy money is now fueling far right parties (the kitchen sink couldn't be far behind). In Bavaria, CSU politicians are even more vocal:

Conflict Grows Between Germany and the ECB - SPIEGEL ONLINE

The most pointed attacks have come from the Bavarian CSU. With the refugee crisis having faded into the background, party head Horst Seehofer has made his opposition to Draghi his next major issue. Bavarian Finance Minister Markus Söder has already set the tone: "The zero-interest policy is an attack on the assets of millions of Germans, who have placed their money in savings accounts and in life insurance policies," he says.

The German government is even reportedly considering taking the ECB to court. Again,  Der Spiegel:

Conflict Grows Between Germany and the ECB - SPIEGEL ONLINE

Such a legal battle between the government and a central bank would be a first in German history. It could lead to a constitutional crisis of unprecedented severity or to currency turbulence -- which is why it is extremely improbable that the two sides would allow the conflict to escalate to such a degree.

But the very fact that senior officials in the German Finance Ministry are considering their legal options makes it clear just how great the frustration with Draghi has become. The ECB head's ever more imaginative ideas for increasing the money supply, say Finance Ministry officials, indicate that he is only concerned about the psyche of the international financial markets and not about average German savers.

Mario Draghi didn't take it too kindly and replied that the ECB isn't into the sole business of preserving German savers' assets:

Mario Draghi takes on his German critics | The Economist

The politicians' complaints seem to have backfired, provoking indignation on the ECB's governing council. Mr Draghi proudly reported that his colleagues had unanimously endorsed not only current monetary policies but also the importance of preserving the central bank's independence. "We obey the law, not politicians," Mr Draghi asserted. The German economy may not need monetary stimulus as much as weaker peripheral countries. But Mr Draghi remarked that the ECB's mandate is to pursue price stability for the whole of the euro zone, not just Germany.

Worse, Mr Dragi continued, any criticism was counterproductive. By undermining the ECB's credibility, critics might make its policies less effective. In the end, that would lead to more stimulus--the opposite of what Mr Schäuble wants. Mr Draghi said he welcomed a "polite, lively debate", but showed no sign of shifting his position.

What to make of all of this? Do as I say, not as I do? Well, that's politicians to you and Germany is no exception.

By blaming everything but the cold weather onto the ECB loose money, Schaüble et fellow politicians are drawing attention away from the cause: the ECB is using the loose money and low interest rates methods because the Eurozone states, led by the German government, refuse to use the budgetary tools. Without enough budget for maintenance and upgrades, German infrastructures are aging, not to mention airport construction projects...

And there is also the question of the fragility of the German banking and financial system: Deusche Bank crisis for instance.

As Romaric Godin in La Tribune wites: four years ago, German officials were chiding their French counterparts for criticizing the ECB instead of reforming themselves; today, the compliment could be returned.

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Mario Draghi didn't take it too kindly and replied that the ECB isn't into the sole business of preserving German savers' assets

Never-ending transfer of economic power upwards is the only goal, German savers' assets being undermined is just unconvenient because German politicians has claimed that they would not be.

By blaming everything but the cold weather onto the ECB loose money, Schaüble et fellow politicians are drawing attention away from the cause: the ECB is using the loose money and low interest rates methods because the Eurozone states, led by the German government, refuse to use the budgetary tools. Without enough budget for maintenance and upgrades, German infrastructures are aging, not to mention airport construction projects...

But the ECB is also the muscle behind the Commissions threats to any state that dares use fiscal stimulus.

ECB blames the states, Germany blames ECB. What can they ever agree on?

Well, there is this:

"If you want the real economy to grow, there are no shortcuts which avoid reforms."
by fjallstrom on Mon Apr 25th, 2016 at 04:36:44 AM EST
Ah yes, ReformTM, that old chestnut...

And it's not only the CDU:

Germany′s populist AfD party wants France excluded from common European currency | News | DW.COM | 24.04.2016

"We can have a common currency with the Netherlands, Austria, Finland or Baltic states. They have similar cultures of stability like ours," Joerg Meuthen, the co-leader of the Alternative for Germany (AfD) party, told the daily Frankfurter Allgemeine Zeitung in an interview to be published on Monday.

The AfD leader told the paper that the political culture of France and the southern European states was different from Germany's. "They don't want austerity at all," Meuthen underlined.

The AfD's deputy leader Alexander Gauland shares Meuthen's views on the exclusion of France and the southern European countries from the eurozone.

"No one wants to throw France out. But France is certainly a political problem. And for that, I have no solution," Gauland said.

by Bernard on Mon Apr 25th, 2016 at 03:35:54 PM EST
[ Parent ]
"We can have a common currency with the Netherlands, Austria, Finland or Baltic states. They have similar cultures of stability like ours,"

Apparently no one has told these neostormtroopers that Finns and Estonians aren't Aryan.  Learning that people can be blonde yet "impure" would make their little, acephalic heads explode.

by rifek on Tue Apr 26th, 2016 at 07:47:01 PM EST
[ Parent ]
Wait until they find out that Lithuanian and Latvian are Ural-Altaic Languages. I am sure they have never heard of linguistic replacement.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Tue Apr 26th, 2016 at 11:53:02 PM EST
[ Parent ]
Perhaps they just want to go back to cosy old East Germany, with a Prussian outlook towards the East...

Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Wed Apr 27th, 2016 at 05:22:42 AM EST
[ Parent ]
Well they have the paranoia part down.
by rifek on Wed Apr 27th, 2016 at 03:34:20 PM EST
[ Parent ]
Your timeline nicely encapsulates how little has changed in the dominant political and economic ideology despite four more years of recession or anaemic growth.  If anything, Governments have doubled down on the austerity approach, and electoral growth has been by parties of the far right who want even more austerity.  As Einstein is reputed to have said: "Madness is doing the same thing and expecting a different result".  Or as Talleyrand is said to have put it: "They have learned nothing, and forgotten nothing".

What is marvellous to me is the sense of entitlement: German savers are said to be entitled to a return on their savings.  And on whose backs is this return to be generated?  The relatively impoverished workers  and unemployed of Greece? Spain? Portugal? By what god given law is anyone supposed to be entitled to interest on their savings, when all they have done is put it into a bank or a relatively risk free investment.

The truth is, they are getting no return on their investment because their governments and banks are refusing to invest it productively on their behalf. It's always somebody else who is supposed to do the work and take the risks...  Maybe one day the "Swabian housewife" will realise that her alleged thrift is not only impoverishing her neighbours, it is ultimately throttling the growth potential of her own family as well.

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Mon Apr 25th, 2016 at 04:02:07 PM EST
Frank Schnittger:
By what god given law is anyone supposed to be entitled to interest on their savings, when all they have done is put it into a bank or a relatively risk free investment.

We have done more than that: we have given up the core of the public pension system for that interest on our savings, and it was exactly what our SPD and CDU and FDP governments told us to do in order to keep our pensions safe. Was that a lie? Bismarck's pension system gave pensioners a little amount, but they still depended on support from their children. After the war there were many old people who no longer had any children, so something had to be done. Adenauer reformed the Rentenversicherung and from then onwards pensions (at least men's pensions) were high enough to maintain a decent living standard without having to ask children for support. This was one of the core features of the German welfare state, and one of the main reasons why the concept of social market economy was so popular. What the NHS is for the identity of the British state, is the Rentenversicherung for the identity of the Federal Republic.

We have been told that firstly we cannot afford this any longer. Secondly that our pensions are safe. That a new reform was necessary. And that our pensions are safe. That we would have to save privately in addition to the public pension, and then our pensions would still be high enough to live from.

If this is not true, and our pensions are not safe, it must either be the fault of the governments that dismantled the pension system, and lied to us, and took the social out of the social market economy, or else it is the Greeks' fault. It is an absolute necessity for our elites to punish the Greeks, and not to stop the discussion of how one can step up the punishment of the Greeks even more. This must be the only thing to occupy our thoughts.

by Katrin on Tue Apr 26th, 2016 at 06:27:27 AM EST
[ Parent ]
Why is it that public benefits like housing or old age pensions which could be afforded in much less prosperous times are suddenly becoming unaffordable now?

For every saver, there has to be a borrower. But with Governments and private citizens in peripheral countries already under water with debt, where are the additional borrowers to come from to provide an income for additional savings?

You can't at the same time flay the Greeks for borrowing both too much and too little. And if their economy crashes, you may lose not only your interest income but your savings as well.

Deutsche Bank is more or less bust, thanks to it's ill advised speculation on derivatives, trying to achieve a return on savings that was simply not sustainable.

There will be no return to high interest rates soon, and anyone who tries to tell you different is lying. In fact you could be lucky not to lose some of your savings as well, without a cast iron European wide savings insurance scheme.

And who will fund that?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Tue Apr 26th, 2016 at 12:18:46 PM EST
[ Parent ]
Frank Schnittger:
You can't at the same time flay the Greeks for borrowing both too much and too little.

I am not so sure of that. We are longing for the good old times when we could invest in Bundesschatzbriefe and they carried good interest while lauding the debt brake and the black zero, too. We are beyond logic, I think. If we weren't, it would necessarily be time for something drastic, and we are not prepared for that.

by Katrin on Tue Apr 26th, 2016 at 01:16:16 PM EST
[ Parent ]
You just need to lend your hard earned money to nice, hard working people who will pay it back to you with good interest, unlike these feckless Greeks.

That no such people do actually exist is of no importance for politicians. Deutsche Bank, on the other hand, has to deal with that reality. The hard way.

by Bernard on Tue Apr 26th, 2016 at 04:24:49 PM EST
[ Parent ]
Why is it that public benefits like housing or old age pensions which could be afforded in much less prosperous times are suddenly becoming unaffordable now?

How else is the Ueberklass supposed to get the more it so richly deserves without taking it from the rest of us?

by rifek on Tue Apr 26th, 2016 at 07:36:19 PM EST
[ Parent ]
Maybe they should call it 'Qualitative Squeezing' instead?

'The history of public debt is full of irony. It rarely follows our ideas of order and justice.' Thomas Piketty
by melo (melometa4(at)gmail.com) on Wed Apr 27th, 2016 at 02:21:05 AM EST
[ Parent ]
"Qualitative Fingernail Extraction"?
by rifek on Wed Apr 27th, 2016 at 03:33:14 PM EST
[ Parent ]
But the ECB is certainly not asking Germany to provide the funds for QE! NO! They are just printing the money. If Germany dares to object the ECB can always say: "well, then, please tell the general public that you are preventing us from defending the payment system." As others here have so often noted defending the payment system is the most fundamental job of a central bank. After all, Euros are the liability of the ECB and only the ECB can print Euros - err - effectively.


"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 28th, 2016 at 11:10:06 PM EST
[ Parent ]
Actually, a 0.75% return when the inflation is down to zero or even negative, is better than 3% return when the inflation was 2.5% (simple arithmetic), but it does look too low for most people anyway...

Not everyone in the EU far right is calling for more austerity: in France, the Front National is actually calling for an end to austerity, increase of minimum wage, along with, of course, protectionism, "buy French", kick the foreigners out of the country (the dark ones, at least), re-establishing the franc and getting out of the EU itself.

It explains part of their success over a large part of the younger, unemployed or underemployed people (also: remember redstar?). Or course, that's what they say now, before getting to power. Both Le Pen père and daughter are billionaires, thanks in part to dubious inheritances and it's difficult to see them getting any seriously after the 1%.

Remember that Hollande was promising left wing policies when running for president 5 years ago. Caveat emptor...

by Bernard on Tue Apr 26th, 2016 at 04:19:38 PM EST
[ Parent ]
"Both Le Pen père and daughter are billionaires"

Not to defend them but that's millionaires with an m.

Unless you count in a pretty exotic currency of course.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi

by Cyrille (cyrillev domain yahoo.fr) on Wed Apr 27th, 2016 at 05:27:31 AM EST
[ Parent ]
Such as french Francs?
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Apr 27th, 2016 at 05:33:13 AM EST
[ Parent ]
Most reports would state that this would be a long way from being enough, although I found one that claimed a much higher figure than the others, one that would have put it above a billion francs indeed.

Earth provides enough to satisfy every man's need, but not every man's greed. Gandhi
by Cyrille (cyrillev domain yahoo.fr) on Wed Apr 27th, 2016 at 08:55:49 AM EST
[ Parent ]
I guess that must have been the random first one Google found for me.
by gk (gk (gk quattro due due sette @gmail.com)) on Wed Apr 27th, 2016 at 08:59:25 AM EST
[ Parent ]
Francs are de rigueur with the Le Pen, of course. We don't know exactly how much does the clan Le Pen has stashed away: the French fiscal authorities are looking at their real estate assets, that have curiously been under-evaluated. The "Panama papers" are also hinting at some nest egg stashed away.

I suppose they'll have to get the presidency to have access to "real money"...

by Bernard on Thu Apr 28th, 2016 at 03:39:35 PM EST
[ Parent ]
Same in Austria. The FPÖ also promises a plebiscite on TTIP and other good things. Not that they delivered last time. Still, the other parties look pretty weak. Especially the government. And in the end they'll just blame the refugees for their losses.
by generic on Thu Apr 28th, 2016 at 06:09:14 AM EST
[ Parent ]
"(also: remember redstar?)."

Where the fuck is redstar, anyway?   ⭐️  Hanging out with poemless?

They tried to assimilate me. They failed.

by THE Twank (yatta blah blah @ blah.com) on Wed May 4th, 2016 at 06:25:25 PM EST
[ Parent ]
Maybe one day the "Swabian housewife" will realise that her alleged thrift is not only impoverishing her neighbours, it is ultimately throttling the growth potential of her own family as well.

Wouldn't count on it.  She's a chemist, so to her, synergy just produces extra toxicity.  The world outside of a lab is truly a mystery to her.

by rifek on Tue Apr 26th, 2016 at 07:43:03 PM EST
[ Parent ]
The interesting twist is that, for most of its existence, as fjallstrom noted, "the ECB is also the muscle behind the Commissions threats to any state that dares use fiscal stimulus."

Graeber:

What's more, tight money policies and the need to balance budgets having been used as the main weapon to chip away welfare-state policies in Europe, it has necessarily become the stake of political struggles between bankers and pensioners, creditors and debtors, just as heated as those of 1890s America.

So, what's changed? The EZ economy tanking and the ECB "wise men" realizing that loosening the money supply was the only way to avert a total meltdown?

The ECB is surely supporting ReformTM, but it looks like they have now parted ways with the absolutists in the German political class.

by Bernard on Thu Apr 28th, 2016 at 03:56:30 PM EST
In truth the ECB HAS to part ways with German foamers. Else they have to let the Euro fail. It is obvious to all but German foamers that the worst possible outcome is for the Euro to fail.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Apr 28th, 2016 at 11:16:32 PM EST
[ Parent ]
Decoupling? Before tight monetary policy was used to batter workers and the welfare state into submission, because even with the Euro loose monetary policy would reduce funding constraint. After the near collapse, Cyprus and Greece that is less true.
Additionally the direct approach is much stronger than it used to be. Now either laws are dictated outright (Troika), parallel legislative and judicial systems are built(TTIP), and the whole neoliberal brain rot is being increasingly written into constitutions(debt brakes).
by generic on Tue May 3rd, 2016 at 03:45:18 AM EST
[ Parent ]


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