Negative interest rates, helicopter money trigger Clash of Titans.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Relations between the government of Europe’s biggest economy, Germany, and Europe’s most powerful financial institution, the European Central Bank, have soured to the point of curdling.
The latest volley of barbed remarks came from Germany’s dour Finance Minister Wolfgang Schäuble, who has never been one to mince his words. Speaking at an awards ceremony outside Frankfurt on April 8, he told the audience that the stellar rise of right-wing populist Alternative für Deutschland party was due in large part to the ECB’s loose monetary policy.
“I told Mario Draghi … you can be very proud,” according to a report by a Dow Jones journalist who was present.
Schäuble’s off-the-cuff remarks set in motion a flurry of caustic statements from other conservative German politicians, with the lion’s share of the ire reserved for the ECB’s negative interest rate policy.
“Mario Draghi’s policies have led to a massive loss of credibility of the ECB,” said the deputy head of the CDU parliamentary group, Hans-Peter Friedrich, who also called for Draghi to be replaced by a German when the Italian completes his term, in 2019. “The next ECB Chief must be a German, who feels bound to the German Bundesbank’s tradition of monetary stability.”
Friedrich’s sentiments were echoed by the CSU foreign policy expert and member of the Bundestag Hans-Peter Uhl. “We cannot afford another Draghi,” he said. “We need to place a key German financial specialist at the head of the ECB.”
As the German daily Handelsblatt notes, the latest exchange marks a new low for Germany’s policymakers in their relations with the Frankfurt-based ECB. The main trigger for the latest storm of protest was Draghi’s praise last month for the idea of “helicopter money” – showering citizens with newly created money.
For a country that has traditionally prided itself on its fiscal rectitude and which less than a century ago lived through one of the worst recorded episodes of hyperinflation, the prospect of handing out free money, created out of nothing, to Eurozone citizens was just too much to bear.
Although the ECB has since backtracked on the idea of helicopter money — publicly at least — its unbridled enthusiasm for negative interest rates has probably already done enough damage, threatening to upend banking’s centuries-old model of safeguarding deposits and charging interest on loans.
Many German banks are already feeling the pinch. Germany’s biggest bank, Deutsche, has made headlines for a string of huge losses as well as massive exposure to risky derivatives. It also faces the prospect of costly lawsuits over its role in the manipulation of the London “fix” price for gold and silver. As if that were not enough, it has to find a way of turning a profit with below-zero interest rates, as do all other German — and for that matter, Eurozone — banks.
If the ECB’s flirtation with negative interest rates becomes a serious affair, banks — particularly the smaller ones — will begin falling like flies.
“We can cope with the current interest-rate environment or even a bit lower,” said Gerrit Zalm, chief executive officer of ABN Amro Group NV, in an interview in Shanghai last week. “But if we were really going into the very negative interest-rate environment, a lot of banks including us will have a difficult period.”
Zalm’s comments were made in early March. Since then Draghi has lowered the deposit rate on money parked at the ECB from -0.3% to -0.4%. He also cut the main refinancing rate by 5 basis points to 0%.
It’s not just German banks that are feeling the pain. As the Wall Street Journal recently reported, German life insurers are caught in a pinch that could eventually “threaten their survival”, as regulators force them to boost capital levels at the same time that low rates make it exceedingly difficult to turn a profit from their investments.
“What is dangerous is that the return on many investments is no longer reflective of the underlying risk involved,” said Mr. von Bomhard, CEO of Munich Re . “Many investors feel forced into taking higher risks.”
So concerned are German regulators about the impact of negative interest rates that they have said they can only be sure the life insurance sector is safe through 2018. Even today, half the industry would be short of capital without the help of “special measures.”
The problem is not just keeping the sector alive; it’s providing enough returns to keep Germany’s burgeoning ranks of pensioners in the lifestyles they’ve grown accustomed to. Many Germans, especially core conservative voters, have plowed their saving in annuities and other plans that invest in low-risk government debt. But thanks to the low rates, those investments aren’t appreciating. According to a new report by public broadcaster WDR, almost half of workers who retire in 2030 will receive pensions below the minimum social welfare level.
Crumbling entitlements coupled with a barren investment landscape, largely thanks to the ECB, have emerged as prime political fodder, particularly for the upstart AfD. SDP lawmaker Manfred Zoellmer: “The AfD gained strength with the refugee crisis, but you can expect that they’ll make the expropriation of the people through Europe the next big issue.”
If votes are on the line, you can expect politicians to listen and at the very least pretend to kick up a fuss. Germany has already opposed a number of ECB initiatives. When Draghi announced last month that it was considering pulling the plug on the €500 note, the German Bundesbank hit back with a scathing critique [read: Freedom Always Dies Bit by Bit”: Bundesbank Takes Sides in War on Cash].
The attacks on the ECB have gotten so loud that the Bundesbank moved to defend ECB policy, arguing that weak price pressures in the currency area demand an expansionary monetary policy stance, and it warned against undermining the central bank’s jealously guarded independence. A number of senior bankers also spoke up in Draghi’s defense.
But many of Germany’s conservative politicians seem unmoved, especially now that a new political party is on the scene threatening to take their cushy seats. “It’s the right debate to have to say that we need another interest-rate policy in the mid- to long-term,” said Thomas Schaefer, CDU finance minister for the state of Hesse, home region of the ECB’s Frankfurt headquarters. “The ECB is in a position of independence, but that doesn’t mean it’s untouchable.” Try telling that to Super Mario. By Don Quijones, Raging Bull-Shit
You know things are bad when even the firmest believers begin questioning their faith. That’s what’s happening in the EU, which faces a constellation of threats and challenges. Now even the staunchest Eurocrats are beginning to express doubts – amid fears of “further escape referendums.” Read… It’s Gotten So Bad in Europe, Even Eurocrats Begin to Worry
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How can so much misfortune fall on Germany? It never ends.
Part of the Kabuki.
Faux protests for the consumption of the public.
If there was enough support against EB bank polices things would change.
Who put Draghi in charge?
…..oh yeah…. thats right …….Goldman Sachs.
I agree, it’s all Kabuki. Had the Germans (or rather the Bundesbank et all) wanted to press the issue, they could, but so far they’ve only been pontificating for the masses.
Mr Quijones nails it as his usual: German politicians could not care less about who chairs the ECB or which interest rates it charges. But they are very worried a new party could take away their cushy jobs.
Since they cannot blame their own policies (more of which in a minute), they blame the ECB, a fair target.
Conveniently left out is the Grosse Koalizion has paid lip service to sound monetary policies but has happily welcomed anything originating from Frankfurt.
Germany may not have Italy’s monster sovereign debt, but it still hovers around 80% of the GDP and historical yields were in the 3% range. Now they are in the 0% range: billions saved each year.
Even more critical is how the ECB has helped Deutschland AG, both directly (much lower debt servicing costs) and indirectly (incentivating Italian and French consumers to get in debt to buy German goods), and how “thrashing” the euro helped exports worldwide.
If the German government is bleeding votes, it only has itself to blame. At any moment they could have thrown their weight against the ECB, instead of bullying Greece. They could have avoided the “refugee” fiasco, which is likely costing them far more votes than monetary policies. They could have done more to protect personal data, a big concern in Germany, instead of meekly bowing to the Wise Father in the White House. They could have worked to find a peaceful solution in Ukraine instead of trying to appease Washington.
But this may be nothing more than a not-so-clever ruse to cover the beating German exports are taking, especially on emerging markets.
China’s GDP continues to grow at a steady 7% but you’d never tell by looking at import data: German cars, industrial diesel engines, cranes, milling machines etc are a field of red as far as the eye can see.
Russia and Brazil, two important markets (very important in Brazil’s cases), aren’t even attempting hiding they are in full recession mode.
As we say around here, the Devil teaches how make pots but not lids…
Good points, however I think that this article and many others ignore that the current policies are not only good for the parasites at the top (the elites, the banksters, the multinationals, financial speculators etc.) but also for a huge number of parasites at the bottom. The ECB and the politicians know this very well.
Netherlands was the only country that voted against the last ECB decision. But it is all a smokescreen. Netherlands, despite its AA(A?) rating, has a debt (public + private) of over 350% of GDP, only Greece is worse. The current ECB policies are a boon for a huge percentage of the voters, those with a mortgage (a majority of the population). Their mortgage payments have dwindled to almost nothing and the value of their homes is again appreciating by (ten)thousands euros every year. Many of these citizens get an extra income thanks to Mario and his gang.
Also, government workers and people on some types of social security have again increasing incomes despite all the ‘deflation’ talk.
Of course, someone pays the price and those are the savers, the renters (in the free rental market) and the middle class in general (self employed etc.). But in Netherlands those are a minor percentage of the voters so politicians could not care less. Of course they will, just like the banksters, warn against Mario’s policies to cover their a** and maybe try to get some votes from the middle class, but even if they could they would not think about stopping the ECB. After all, what politician doesn’t like handing out free money in spades to the voters thanks to ZIRP?
There is another group that is going to be hurt badly and that is big in numbers, but they are not hurting yet: the future pensioners and taxpayers. But politicians get away with that, it won’t be a problem within 4 years so it is irrelevant.
The situation in Germany is a bit different, but I guess many ordinary German workers have profited handsomely from the improving German exports thanks to ZIRP-for-multinationals and a plunging euro and from the extremely low rates for government debt. Apart from clueless politicians, these countries all have the same problem: they act like American colonies, instead of doing what is good for their own population (especially in the long run).
The narrative has refocused from ECB QE to ECB helicopter money, there’s a message there I believe.
Showing what occurs when one group’s self-referential fantasies rams into another group’s self-referential fantasies.
Okay, it seems clear to rational thinkers that Europe cannot afford to continue delusional monetary policies such as QE, Zirp, Nirp, and helicopter money distribution. This article begs the question: “What can Europe afford?
Can Europe afford: (a) its social programs?; (b) The Euro and its resultant trade and financial distortions?; (c) Its banking system?; (d) Shengen?; (e) The migrant tsunami?; (f) politics of emotion over factual analysis?; (g) USA political meddling?; (g) the Brussels bureaucracy?; (h) military escapades in Iraq, Afghanistan, Libya, Syria, Somalia, Sudan, Central African Republic, etc.?; (i) sanctions against Russia?; (j) the build-up of NATO forces to threaten Russia?; (k) the current sovereign debt loads?; (l) its current budget deficits?; (m) the levels of unemployment in Greece, Spain, Portugal, etc.?; (n) the non-performing loans held by banks in Europe?; (o) the mess in Ukraine?; (p) Erdogan and the Turkey mess?; (q) Merkel’s floundering policies?; (r) Brexit?; (s) falling rates of marriage and falling birth rates?; (t) its entrenched wealthy class?; (u) its entrenched political and bureaucrat class?; and so on?
Reining in Draghi and the ECB is merely trying to rearrange a few deck chairs on the sinking ship. And reining in the ECB will do little to rein in other central banks or the international investment bankers and their Trillions in derivatives. The accumulated debt load of nations, businesses, and individuals is beyond our ability to service, let alone pay off. Only Zirp and Nirp policies are holding off default.
Will we escape total financial melt-down and social collapse? How?
Helicopter Money wouldn’t be created out of nothing ! it instantaneously is reflected as a Loss on ECB Balance Sheet as there is no loan counterparty. You wouldn’t easily be able to hid it and ECB Insolvency would be rightly questioned. it is one thing to try to control a devaluation of a currency but it would be an other kind of mess if ECB would totally loose grap on this process..Members States would have to fill the gap which implies either Borrowing Money to fill it up ie potentially attributing a financial loss to someone else at a future date – more Ponzi – or Taxes of some kind would have to be raised. How / which Economic Agent you Tax will decide the final outcome/target of the printed money. But no free lunch it is.
Zalm of abn amro was no doubt in Shanghai in March for a heads-up about linking the yuan to gold, and this was also perhaps the reason for the extra Fed meetings, so I will add (v) can Europe afford to have its assets marked to market? I don’t think American Big Banks can (Snow did not in’08).
The Mafiosi in charge of the ECB has just been told you are not bullet proof.
He may have done just about all he can for his master Imploding Italian banking industry.
The mood says the Mafiosi must go in 2018. The question becomes, who replaces the Mafiosi
Without a doubt Mario the mobster will be replaced by another Goldman Sachs maffioso with very similar policies. That could even be a ‘fair democratic decision’: after all, the southern EU countries – who are almost all in favor of massive money printing to wipe away the debts – have a big majority in the ECB council.
Back when Trichet’s term was ending it was supposed to be Axel Weber who would get the job next. The why and how Weber was replaced with Draghi has got to be a very interesting story. My guess it was the need to ‘save’ the Euro with all those Ponzi emergency funds, EFSF, ESM etc whereby Italy guarantees the bonds of Spain and Spain the bonds of Portugal and Germany guarantees the bonds of everyone else that made Weber unwelcome.
Weber quit in disgust. He was in line to be president, saw what was coming down the pike … the pressures to print money and bail out bondholders (of Greek, Italian, etc. sov. bonds), and he packed up and left.
Jürgen Stark, the other forceful no-money-printing and no-bondholder-bailout guy on the ECB’s Board, quit in disgust not much later.
Draghi is out of control, seemingly bought off by his former employer Goldman or those in government. The rapacious approach to savers and sound money will leave a butcher’s bill to pay.