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As Eurozone Economy Strengthens, Divisions Within ECB Re-Emerge

Posted by hkarner - 9. März 2017

Date: 08-03-2017
Source: The Wall Street Journal

Mixed messages reflect the difficulties of crafting a single monetary policy for 19 nations

FRANKFURT—Europe’s economy is accelerating, sparking optimism during a year of contentious politics but also rekindling a war of words between the eurozone’s top monetary officials.

In one camp is European Central Bank President Mario Draghi, who wants to avoid dramatic moves with fraught elections looming in the Netherlands, France and Germany. In the other is German Bundesbank President Jens Weidmann, an ardent critic of the ECB’s easy-money policies, who is concerned the dosage of stimulus is too strong for a healing economy.

The two sides closed ranks last year when the bloc flirted with deflation and the ECB came under attack from senior German politicians. But divisions are re-emerging as the bloc’s €10 trillion economy strengthens.

In a rare turn, the eurozone is currently the fastest-growing major advanced economy, according to financial-data firm IHS Markit, and its inflation rate has rebounded to 2%, slightly above the ECB’s target rate.

The ECB’s 25-member governing council, which will hold a policy meeting in Frankfurt on Wednesday and Thursday, needs to chart a course between its opposing poles without jeopardizing the region’s economic fortunes.

The mixed messages reflect the difficulties of crafting a single monetary policy for 19 nations with 15 different languages and widely diverging expectations for what a central bank should do. Whereas a French audience might be concerned about the euro exchange rate, Germans are more worried about inflation.

Former ECB president Jean-Claude Trichet “would tell me that if he took a walk in Frankfurt, people would often ask him, ‘When are you finally going to raise interest rates?’” Mr. Draghi said in a 2014 speech. “But if he took a walk in another major city just a few days later, people would ask him, ‘When are you going to lower interest rates?’”

All but one of the bank’s top 25 officials handles monetary policy in a second language: English. An in-house English-editing team parses official communications. At meetings, officials must wrestle over the meaning of words.

All that is a headache for investors, who are struggling to gauge when the ECB might start winding down, or tapering, its €2.3 trillion bond-purchase program. From the outside, economists say, it is difficult to judge how much of the debate within the ECB hinges on the economy’s strength and how much is politically driven.

“It is a semantic discussion that could have one big loser: the ECB’s reputation,” said Carsten Brzeski, an economist with ING-DiBa in Frankfurt.

The struggle comes as communication becomes a key policy tool for central banks in the developed world, which have rolled out new measures to explain their actions and guide investor expectations ever further into the future.

Measures over the past few years to increase transparency include publishing minutes of policy meetings, publishing diaries of ECB board members, and forward guidance that states how the ECB will act in coming years.

Federal Reserve officials, unlike their ECB peers, have recently sent a fairly consistent message that they might raise interest rates later this month.

“The ECB is a unifying institution for national voices whereas the Fed has the authority to act as central bank for a union with a central government,” said Lena Komileva, chief economist at G+ Economics in London.

ECB officials once adhered to a “single voice principle,” presenting a unified message to the outside world, according to Niels Bünemann, a former ECB press officer who now works as a consultant. National central banks were tasked with explaining that message to domestic audiences.

But that unity evaporated when the ECB shifted from interest-rate moves to untested policy measures, such as large-scale bond-purchase programs, said Mr. Bünemann, who left the ECB in mid-2014 after 15 years.

The Bundesbank in particular has become much more assertive in addressing an international audience, including by translating its website into English and French, he said.

The war of words over arcane financial tools like quantitative-easing programs shows how anti-European Union forces roiling the bloc are influencing every debate, even within one of the EU’s cornerstone institutions.

With the ECB, “there is a perception that policy decisions are borne out of political opportunity rather than tied to economic data,” Ms. Komileva said.

Nowhere has the eurozone’s recovery caused more tension than in booming Germany, Europe’s economic powerhouse, where a historic aversion to inflation and debt has made Mr. Draghi a favorite target.

In a sign of the tensions, Sabine Lautenschlaeger, the German member of the ECB’s executive board, came under attack in the German press last month for welcoming a rise in inflation toward the ECB’s target.

Each side presents itself as the defender of sound monetary policy that could reflate the economy. Complicating the tussle is the Bundesbank’s status as the ECB’s most powerful member.

In a widely-praised feat of linguistic contortion, Mr. Draghi argued in December that a decision to slow the central bank’s massive bond-purchase program from April didn’t amount to tapering. “The word [tapering] has several meanings depending on who is using it,” Mr. Draghi told reporters.

Mr. Weidmann is equally agile. He told reporters recently that he agrees with the “orientation” of ECB policy, but not with the policy itself.

Mr. Draghi is expected to leave his message essentially unchanged at a news conference on Thursday. Policy makers have indicated they want to continue QE at least through December to ensure that the recovery has taken root. But some time this year, perhaps over the summer, policy makers are expected to signal a change of course.

In one crucial respect, Messrs. Draghi and Weidmann are on the same side: In an atmosphere of mounting euro skepticism, both in their way are trying to keep Europe’s citizens on board.


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