One month ago, when Mario Draghi unveiled his quadruple-bazooka QE expansion, which for the first time ever included the monetization of corporate bonds, the German press, in this case Handelsblatt, had a swift reaction. It did not approve.
Fast forward a month later when the ECB is now contemplating the final monetary gambit, launching helicopter money, and Germany's most respected (in official circles) financial media, Spiegel, is out with an article titled "Germany Takes Aim at the European Central Bank", in which - as expected - we read that relations between Germany and the Frankfurt-based ECB have just hit new lows:
There was a time when the German chancellor and the head of the European Central Bank had nice things to say about each other. Mario Draghi spoke of a "good working relationship," while Angela Merkel noted "broad agreement." Draghi, said Merkel, is extremely supportive "when it comes to European competitiveness."
These days, though, meetings between the two most powerful politicians in the euro zone are often no different than their face-to-face at the most recent summit in Brussels. She observed that his forced policy of cheap money is endangering the business model of Germany's Sparkassen savings banks and retirement insurance companies. He snarled back that the sectors would simply have to adapt, just as the American financial sector has.
This is nothing new: we have been hearing laments by Europe's biggest bank, Germany's Deutsche Bank, that the ECB has gone too far for over two months now (initially in "A Wounded Deutsche Bank Lashes Out At Central Bankers: Stop Easing, You Are Crushing Us"). But for Merkel to take her feud in the open, and seeking to once again freeze relations between Germany and the ECB at this fragile juncture for the future of Europe, when Draghi has once again failed to stimulate inflation, when he has crushed European banks, but at least has unleashed a massive debt issuance spree, is troubling.
The alienation between Germany and the ECB has reached a new level. Back in deutsche mark times, Europeans often joked that the Germans "may not believe in God, but they believe in the Bundesbank," as Germany's central bank is called. Today, though, when it comes to relations between the ECB and the German population, people are more likely to speak of "parallel universes."
The reason for German anger: rates.
ECB head Draghi doesn't understand why he is getting so much resistance from the country that has profited from the euro more than any other. Yet Germans blame Draghi for miniscule yields on savings accounts and life/retirement insurance policies. Frustration is growing.
Draghi has pushed the prime rate down to zero and now even charges commercial banks a fee for parking their money at the ECB. He has also bought almost €2 trillion worth of bonds from euro-zone member states, making the ECB one of the largest state creditors of all time.
During his most recent appearance before the Frankfurt reporter pool, he went even further. The idea of pumping money directly into the economy, he said, was a "very interesting concept," with a helicopter to distribute the money across the country if necessary, as economists have half-jokingly recommended. Doing so is seen as a way of boosting the economy. German money being thrown out of a helicopter: It would be difficult to find a more fitting image to show people that the money they have set aside for retirement may soon be worth very little.
If you want to get Germans angry, really angry, just suggest hyperinflation which is what helicopter money always leads to. They are really angry now; and an angry electorate is something Merkel, who has seen her popularity crushed as a result of Germany's grotesque refugee experience, does not need..
The criticism of Draghi had already been significant, but his public ruminations about so-called "helicopter money" have magnified it to extreme levels. Even economists that tend to back the ECB, such as Peter Bofinger, who is one of Merkel's economic advisors, are now accusing Draghi of constantly "pulling new rabbits out of the hat." Leading representatives of the banking and insurance sectors are openly speaking of legal violations. And strategists within Merkel's governing coalition, which pairs her conservatives with the center-left Social Democrats (SPD), are concerned that Draghi is handing the right-wing populist Alternative for Germany (AfD) yet another issue where they can score points with the voters. There is hardly any other issue that enrages Germans at town meetings and political party conventions as much as the disappearance of their savings due to the "unconventional measures" adopted by the ECB in Frankfurt.
Then again, just like when Draghi launched QE over Merkel's protests, not even the Chancellor is prepared to openly oppose the former Goldman employee.
By now, the growing dismay has been registered in the Chancellery. Merkel is also critical of Draghi's zero percent interest policy, but she is afraid of making public demands that she may not be able to push through. Still, she is convinced that Draghi must give greater weight to German concerns, so she has resorted to telephone conversations and closed-door meetings to make her case.
Economics Minister Sigmar Gabriel, who is also head of the SPD and vice chancellor, has likewise refrained from publicly criticizing Draghi. Instead, he says it was the "inaction of European heads of government" that has transformed the ECB into "a kind of faux economic government." But Draghi's most recent decision to make money in the euro zone even cheaper has been heavily criticized within Gabriel's Economics Ministry. "It jeopardizes the trust of all those who work hard to establish a small degree of prosperity or a nest-egg for retirement," says one ministry official. "Plus, the cheap money hasn't helped get the economy back on track."
There is only one person who is not worried about offending the Italian central banker: Germany's finance minister, Wolfi Schauble.
Most dangerous for Draghi, however, is the displeasure from the German Finance Ministry. A few weeks ago, Finance Minister Wolfgang Schäuble warned the ECB head that his ultra-loose monetary policies could "ultimately end in disaster." The fact that Schäuble said anything at all is rather surprising, as were the words he chose. Out of respect for the ECB's independence, finance ministers tend not to comment on decisions made by the central bank.
And here we get to the key point - according to Spiegel, the German finance minister is preparing to block the ECB's helicopter money by any legal means possible:
ECB independence is also of vital importance to Schäuble as well. But that is no longer the case when the bank's policies exceed its legal mandate. It is a boundary that Schäuble believes Draghi and his people have crossed, which explains why the minister does not have a bad conscience about abandoning traditional reserve. "We have to initiate this dialogue about monetary policy," says a Finance Ministry official.
Were the ECB, as Draghi has indicated it might, to open the monetary policy gates even wider -- with, for example, helicopter money -- the German finance minister would view it as a breaking point. Such a policy would see the ECB bypass the banking sector and distribute money directly to companies, consumers or states, all of which would stand in violation of the central bank's own statutes. Should it come to that, sources in the German Finance Ministry say, Berlin would have to consider taking the ECB to court to clarify the limits of its mandate. In other words: the German government and Draghi's ECB would be adversaries in a public court case.
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.
Actually, the outcome would be far less dramatic. Remember Draghi's imaginary OMT program, the "deus ex" contraption he had to conceive to validate his 2012 threat of doing "whatever it takes?" Well, that led to a few lawsuits, the German constitutional court it wasn't exactly good... and then washed its hands and punted to Brussels which promptly agreed with the ECB. Why would this time be any different.
We do agree with Spiegel, however, that the threat of legal action indicates how powerless Germany's ruling party suddenly feels: "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."
Next, Spiegel does its best attempt at humor by saying that "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."
Uhm... yes. The ECB's head is not concerned about German savers and yes, he is only concerned about financial markets. Did you really need the ECB to launch helicopter money to tell you that?
But beyond the merely theatrical, one thing neither Draghi nor Merkel seem to have grasped, is that just like everywhere else around the globe, so in Germany the vast majority of the population is now openly angry with monetary policy, even if they can't explicitly name the person behind their anger (around 70% of Americans think the Federal Reserve is a national park):
During a recent visit to his constituency, Kauder's deputy, economics expert Michael Fuchs, experienced first-hand just how concerned voters are about the interest-rate issue. One enraged man screamed at him during an event that Merkel is to blame for the low interest rates. Such anger is fertile soil for the AfD. "On this issue, it isn't easy to counter the AfD," Fuchs says. "The criticism of the ECB is justified." Merkel's coalition, he says, "must clearly say that it finds Mr. Draghi's interest rate policy to be incorrect. We haven't been loud enough."
That's right, because you are terrified of being loud. Because while the ECB's NIRP means a slow death for Deutsche Bank, should the ECB cut off Germany in a full blown vendetta, that would mean the death of Europe's biggest bank overnight.
Meanwhile other politicians are seeing cracks in Merkel's facade and are eager to capitalize on the fury against low rates (and the ECB):
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.
Söder believes that emphatic critique of the ECB will bring political benefits. The ECB may be independent, but it isn't omnipotent, he says. "We need a debate in Germany about the erroneous policies of the ECB," he says. "The German government must demand a change in direction on monetary policy. If things continue as they have, it will be a boon for the AfD." Ahead of a July conclave of the Bavarian state cabinet, Söder has been charged with developing ideas for what can be done to counter Draghi's course.
It's not just politicians: take Nikolaus von Bomhard.
Politically correct to a fault, but with a deep sensitivity to the mood of the people, Bomhard is the head of global reinsurance giant Munich Re. He recently launched a savage attack on the ECB. Because its loose monetary policy has driven up stock and real estate prices, he said, it is primarily benefiting the wealthiest people in the country. He said it was serving to redistribute wealth to the upper classes and it had become impossible to sit back and say nothing. "The people of Germany aren't stupid," he said, adding that political leadership was required.
As a reminder, this is the same Bomhard who as we reportedly previously, recently revealed that Munich Re had set aside gold and also cash in the company's safes. "It is a move that many normal Germans have already made. According to banking associations, the demand for safes and lockers has gone up as people are apparently concerned that they may soon have to pay negative interest rates to their banks, just as commercial banks must now pay the ECB." At least unlike Japan, where the scramble for cash is so great the Finance Ministry has had to print additional ¥10,000 bills, so far Germany hasn't run out of physical money.
Meanwhile, instead of at least pretending to hear German concerns, "Draghi has become increasingly annoyed by the constant criticism coming from Germany. He feels unjustly targeted and has insisted even more stubbornly on the correctness of his policies as a result - such as during a recent speech to German stock traders just outside of Frankfurt. What haven't his German critics tried in their efforts to shed doubt on the measures he has taken, Draghi complained. They have warned of mega-inflation and of a red ECB balance sheet, the ECB head continued, but none of it has come to pass. "Repeatedly, those who have called our decisions into question, have been proven wrong," Draghi said. It was the Mario Draghi that many of his German listeners were all too familiar with: the man who is never wrong."
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In the end, it is absolutely clear that Draghi will be wrong, just as Bernanke was wrong when he said "subprime was contained" or that "there will be no recession" months after one had started, and hundreds of other things the former "I am the smarest man in the world and i know it" was wrong about, but the question whether his error will bring not only Europe, but the entire world to hyperinflationary ruin, may depend on just one thing: whether the Germans succeed in reining him in.
For now, however, we doubt it.
Hours after the Spiegel article hit, Reuters cited the German finance ministry which "denied that it would consider taking legal action if the European Central Bank resorts to "helicopter money" distributions to euro zone citizens, an extreme form of monetary easing."
And so Germany retreats once more, terrified to openly engage the European Central Bank.
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As senior German conservative lawmaker Ralph Brinkhaus was quoted by Spiegel, Germany needed to "put the ECB under pressure to provide justification" because "otherwise nothing will change."
It is clear enough that, at least for the time being, nothing will change and that helicopter money is indeed coming. Trade accordingly.