The Conflict Between Germany and the E.C.B. That Threatens Europedate: 10/24/2014
We’ve known for some time about the tension between the European Central Bank, charged with guiding the economies of the 18 countries that use the euro, and Germany, the largest and richest member of that zone. A news report sheds light on just how dysfunctional that relationship has become.
It’s not an overstatement to say that the future of Europe depends on how this conflict is resolved.
Mario Draghi, the E.C.B. president, is barely on speaking terms with Jens Weidmann, the president of the German Bundesbank (and a member of the E.C.B.'s policy-setting governing council), Reuters reported Thursday. When Mr. Draghi dispatched a deputy to Berlin to visit aides to Chancellor Angela Merkel, the message received was that vocal German attacks on the central bank were unlikely to end anytime soon.
The central issue is that Mr. Draghi and the E.C.B. see Europe as being on the cusp of a triple-dip recession. Europe is also at risk of getting stuck in a cycle of very low inflation and stagnant growth. Inasmuch as it has already cut short-term interest rates to zero (below zero, even), the bank is considering doing an American-style program of quantitative easing, or buying vast sums of bonds with newly created euros, to try to avert this fate. It is also encouraging Germany and other European nations to loosen the purse strings a bit and pursue fiscal policy that is more supportive of growth.
In Germany, by contrast, both elected leaders in Berlin and central bankers at the Bundesbank in Frankfurt view the worry over deflation as overwrought, the need for fiscal probity as critical, and any effort to print money to buy government bonds as the pathway to hyperinflationary perdition.
It’s worth adding that most everybody on this side of the Atlantic, the International Monetary Fund and the United States government, for example, is on Team Draghi in this dispute. Indeed, the widespread view among economists in the United States and Britain is that the risks facing Europe are grave and that the need for easing both monetary and fiscal policy is urgent.
So why will this dispute determine the future of Europe? Because Mr. Draghi is steering through Scylla and Charybdis, with radically different outcomes for Europe on either side.
If Mr. Draghi and the E.C.B. take insufficient action and the eurozone economy indeed stagnates or falls into a long recession, it could mean a lost generation of Europeans living with high unemployment and declining living standards. We can’t know for sure whether Europeans would react to this outcome by being content to muddle through, or if they would elect radical politicians who might endanger the era of a Europe united around liberal democratic ideals. So far Europeans have been O.K. with muddling along amid high unemployment, but it’s a really bad result either way.
If Mr. Draghi and the E.C.B. take aggressive action that alienates Germany too severely, you could see sharp challenges to the central bank from within its largest member. Already, German officials are challenging in the European Court of Justice an earlier E.C.B. program to stand ready to buy bonds. A ruling is expected next year. And that’s for a program that hasn’t actually bought a single dollar’s worth of government bonds! If the central bank begins large-scale quantitative easing, expect more legal challenges to the E.C.B.'s authority, and even calls within Germany to break off from the eurozone entirely and go back to using the German mark.
There are two ways this could go for a happier outcome.
Maybe the European economy will heal itself. Maybe growth will return and inflation will get back to the 2 percent the E.C.B. aims for without much further action out of the central bank. If this happens, the strategy of austere fiscal policy and cautious monetary policy will be vindicated. Then again, we’ve been waiting for that self-generated recovery to come along for four years or so now, and they say the definition of insanity is doing the same thing but expecting different results.
And the final possibility is that Mr. Draghi will display sufficient political savvy to encourage policies that jolt the eurozone economy into a better place while tamping down the blowback. Germans may squawk, but if Mr. Draghi can show both the independence and resolve to take an unpopular action, and the subtle touch to avoid any concrete consequences (like adverse legal rulings or Germany threatening to leave the euro), then his independence will be rewarded.
What the latest reporting shows, though, is just how deep the anger over E.C.B. policies runs in Germany and how tricky this task will be for Mr. Draghi.