Booming German economy puts ECB in crossfire

Bloomberg

The European Central Bank is finding out just how hard it might be to avoid the heat in its home country this summer. In the past few days, Germans have been told that their government will push for the nation to get the next ECB presidency and that monetary policy is the cause of a “too weak” euro. Fresh data on Tuesday bolstered the case for critics who see the euro-area central bank’s stimulus as out of step with the needs of the region’s biggest economy.
The Frankfurt-based ECB has long been a scapegoat in Germany, accused of robbing savers by imposing low interest rates to support the less-productive economies of southern Europe — including Italy, the birthplace of current President Mario Draghi. That makes the institution an easy target for politicians seeking to pick up votes in a Sept. 24 poll.
“The run for presidency is quite a nice topic that German conservatives would like to use in the elections,” said Florian Hense, a European economist at Berenberg Bank in London. “It could be a topic where they mark their difference from the Social Democrats and portray them as too europhile and too lenient toward southern countries.”
Chancellor Angela Merkel, whose Christian Democrat bloc currently leads Martin Schulz’s Social Democrats in opinion polls, waded in on Monday. Asked how to deal with Germany’s trade surplus, which regularly attracts international criticism and has been a particular point of tension with US President Donald Trump’s administration, she pointed to the ECB.
“The euro is too weak — that’s because of ECB policy — and so German products are cheap in relative terms.” The euro has fallen by almost 20 percent against the dollar since mid-2014, when the ECB first cut its deposit rate below zero and kicked off asset purchases that would later morph into a 2.3 trillion-euro ($2.6 trillion) quantitative-easing program. In trade-weighted terms, it’s down 5 percent.
The latest German economic figures appear to back Merkel’s case. Trade was the single biggest contributor to growth in the first quarter, while steadily increasing demand bolstered investment. A measure of business confidence published Tuesday rose to the highest level since records began in 1991, and a purchasing managers’ survey showed private-sector growth accelerating at the fastest pace in six years.
Yet the ECB, focused on weak inflation in the euro area, looks unlikely to move much closer to an exit from unconventional monetary stimulus when the
Governing Council meets on June 8.