Draghi brings German olive branch back to ECB bruised by row

Bloomberg

If Mario Draghi brought a souvenir back from his trip to Washington, it might just be an olive branch. As the European Central Bank prepares for a policy decision this week, its president will return to his desk armed with an endorsement of stimulus by the International Monetary Fund, and an apparent truce with one of his most prominent critics. German Finance Minister Wolfgang Schaeuble ended days of political needling by describing Draghi as a “friend.”
While the discussion between the euro area’s two most powerful financial policy makers at a dinner on Friday remains private, that remark may relieve officials after a week of bruising German attacks on the ECB.

German Irritation
Facing elections next year as a populist right draws pensioners hurt by low interest rates, Schaeuble had kicked ECB policies in a free-for-all that alarmed the institution and prompted the Bundesbank to defend central-bank independence.
“We have already started to see more balanced comments and tones, and it is obviously good to see the situation normalizing,” said Marco Valli, chief euro-area economist at UniCredit Bank AG in Milan. “Ultimately, no country of the euro area would benefit from a weaker and de-legitimized ECB.”
German irritation has been mounting as the ECB embarks on ever more unorthodox policies to restore euro-area price stability. The rumbling discontent erupted this month when Schaeuble told a German economic think-tank that Draghi shared the blame for the electoral rise of the Alternative for Germany party. He also said ECB policies were creating “extraordinary problems” for German retirement planning, triggering an unusually blunt response from Bundesbank President Jens Weidmann.
“The independence of monetary policy is an important asset,” he told Schaeuble on Friday. “It mustn’t put the focus on needs of any individual countries, and it also mustn’t calibrate its policy based on the wishes of individual groups, be it creditors or debtors.”
Another sideswipe from Germany came on Sunday when Bavarian finance minister Markus Soeder said in an interview with Bild, the country’s biggest-selling newspaper, that the ECB’s zero interest-rate policy “creepingly expropriates” the nation’s savers to finance southern European nations. The institution’s next head should be German, he said. Finance Ministry spokeswoman Friederike von Tiesenhausen told reporters on Monday that the question of Draghi’s succession is not an issue right now.
The ECB president’s term expires in October 2019. The institution, which is modeled on the Bundesbank, has never been led by a German.
Germans’ trust in the ECB has almost halved since the beginning of crisis, with just one third of the population expressing confidence in the central bank in the latest Eurobarometer survey in November 2015.

Settling Differences
Even if Schaeuble and Draghi settled their differences in Washington, distrust from the currency bloc’s largest economy is likely to remain a concern for an institution that is already struggling to stay credible after three years of missing its inflation goal. In a Bloomberg survey published on Monday, most economists said the central bank will probably have to ramp up stimulus yet again after the summer.
Draghi’s stance is uncontested among most global finance ministers and central bankers, who pledged on Saturday to “employ a more forceful and balanced policy mix” to strengthen global growth. The IMF’s top policy advisory committee also recommended that “accommodative monetary policy should continue in advanced economies where output gaps are negative and inflation is below target.”
For its part, the ECB has no plan to change its policy and is concerned that inflation will recover far too slowly if governments don’t help with structural reforms and fiscal stimulus where they have room.
German Chancellor Angela Merkel urged her European peers last week to do their part to promote growth and generate inflation as a way to enable the ECB to alter its policy. Draghi told international finance chiefs that the Governing Council “will continue to do whatever is needed to pursue its price-stability objective.”