European Central Bank President Mario Draghi rejected German criticism of the bank’s super-loose monetary policy on Wednesday, calling sub-zero interest rates a necessity and urging Berlin to share the burden with more spending.
Questioned by lawmakers who say the ECB’s monetary policy has damaged the eurozone and fuelled the rise of right-wing populists, Draghi said Germans were actually net beneficiaries of the ECB’s policies and that it was also up to the German government to lift growth, a precondition for rates to rise.
After repeated clashes in recent years, a tentative truce between the bank and Europe’s biggest economy is showing signs of cracking as the ECB contemplates even more stimulus despite vocal objections from the German establishment.
“On balance, savers, employees, entrepreneurs, pensioners and taxpayers across the euro area, including in Germany, are better off because of our actions — today and tomorrow,” Draghi told the Bundestag’s European Affairs committee, a day before he was due to hold talks with Chancellor Angela Merkel.
“What we need now is to allow our measures to develop their full impact,” he said, adding that Berlin should spend more.
Draghi warned lawmakers that too many attacks on the ECB could even force the bank to take more action as the effectiveness of its measures could be damaged, committee members who attended the closed-door meeting said.
Facing lacklustre growth and the threat of deflation, the ECB has slashed rates into negative territory and so far bought more than a trillion euros’ worth of government bonds to cut borrowing costs and revive spending by firms and households.
But many in financially prudent Germany argue that sub-zero rates upset financial stability, consume household savings, destabilise banks and reward financial mismanagement by eurozone governments.
“What was also discussed is that the low interest rate policy works like a hidden rescue package although the German Bundestag never gave its approval for this,” Gunther Krichbaum, the head of the European affairs committee, said.
The ECB’s calls for more government spending annoy Germany, where balancing the budget is a national obsession and a cornerstone of finance minister Wolfgang Schaeuble’s economic strategy.
The heart of the problem is that German households prefer uncomplicated savings products that now yield nothing, eating into the retirement prospects of millions and endangering hundreds if not thousands of small savings banks.
Some political analysts also argue that much of the criticism may be a way of deflecting attention from Merkel’s increasingly unpopular refugee policy and the poor showing of her Christian Democrats (CDU) in regional elections.
Draghi rebuffed lawmakers’ criticism, arguing that the German government alone had saved €28bn last year through lower than expected interest payments.
“In fact, evidence shows that between 2008 and 2015 interest payments by households in Germany, as a percentage of gross disposable income, fell more sharply than interest earnings,” Draghi said.
“Of course, low interest rates for a long period might carry the risk of overvaluation in asset markets as a result of the search for yield. But at the moment we are not seeing any overheating in the euro area or the German economy as a whole.”
He also rejected complaints that ECB policy was responsible for problems at Deutsche Bank, Germany’s biggest lender.
With the eurozone economy responding to stimulus more slowly than expected, the ECB is now looking at fresh options. To German ire, markets are pricing in a six-month extension to its 80 billion euros per month of asset purchases.
Draghi also said the ECB needed to be especially careful in raising rates, citing Sweden as a negative example, committee members told Reuters. Its Riksbank raised rates prematurely in 2010 and 2011 before reversing course in later years to bring its repo rate below the ECB’s deposit rate.
With a national election just a year away, Merkel is facing growing discontent, even from her coalition ally, raising doubts over whether she can lead her conservatives to a fourth election victory in a row.
Draghi struck a somewhat conciliatory tone earlier on Wednesday, admitting that the ECB did not yet fully understand the consequences of all of its actions, given that it was using novel and untested tools, so scrutiny was fair and welcome.
“Little is known to date of the distributional consequences of the unconventional tools we have used, either in respect of their impact or over the medium term,” Draghi said.
In uncharted waters, closer cooperation is needed between fiscal and monetary policy to minimise side-effects, Draghi argued.
The ECB argues that Germany relies too much on exports, neglecting its internal market and running up huge trade surpluses without recognising that its economic good fortune may not last. More spending at home would balance the German economy and trickle down to the rest of the eurozone, helping the entire bloc, it argues.
Underlining a lack of policy coherence among the eurozone’s top economies, however, Italy hiked its budget deficit target for the second time in five months on Tuesday, a move that could set up a clash between Rome and Brussels.