ECB Battle

Big Fight for Small Gain

Draghi ECB HB
Face off at the ECB. Mario Draghi and Sabine Lautenschläger.
  • Why it matters

    Why it matters

    A public spat over how to rescue the euro zone’s economy could significantly weaken the Frankfurt-based ECB.

  • Facts


    • The European Central Bank may start an ambitious plan to buy government bonds in the first months of next year.
    • As many as six ECB council members oppose the plan, sources say.
    • Annual inflation in the euro zone fell to 0.3 percent in November – well below the ECB’s target of 2 percent – and could fall to 0 percent in January.
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Mario Draghi is preparing his most ambitious step yet to revive the euro zone’s moribund economy – and many say it will be dead on arrival.

The plan by the European Central Bank’s president to buy hundreds of billions of euros worth of government bonds in the 18-nation euro zone could begin as early as next year, analysts told Handelsblatt.

It is a last gasp effort by Mr. Draghi and the ECB to right the European ship and end the continent’s economic doldrums.

While the euro zone is out of recession for the moment, growth in the currency bloc has remained well below 1 percent. Economists at Germany’s Commerzbank are predicting that inflation could fall to zero percent in January from its current 0.3 percent, bringing deflation – the current archenemy of global economists – ever closer.

By buying government bonds, Mr. Draghi would follow in the footsteps of many other major central banks around the world — such as the U.S. Federal Reserve, the Bank of England and, most recently, the Bank of Japan — that were quicker to enact “quantitative easing” programs since the 2008 financial crisis.

The only trouble: Many economists believe quantitative easing won’t work in Europe, and Mr. Draghi’s proposal has opened a major rift among members of the ECB’s governing council, the board of euro-zone central bankers that sets interest rates every month.

The debate over the ECB’s next step will begin in earnest Thursday when the ECB council meets for the last time this year, and for the first time in a brand new headquarters building on the outskirts of Frankfurt.

“Unconventional measures have one thing in common. Starting them is easy but exiting from them is difficult.”

José González-Páramo, Former member of ECB governing council

Germany is leading opposition among Europe’s central bankers, arguing that the move to buy government bonds will be ineffective at best and, at worst, a violation of the ECB’s mandate.

Sabine Lautenschläger, a member of Mr. Draghi’s inner circle of advisors who sits on the bank’s administrative executive board in Frankfurt, spoke out against quantitative easing over the weekend – just days after Mr. Draghi gave a speech favoring the ECB action.

Jens Weidmann, the president of the Bundesbank, Germany’s central bank, is also a vocal skeptic of the plan.

Germany is not alone in its opposition.

Financial sources say that Mr. Draghi may have to forego support of as many as six members on the ECB’s 23-person governing council if he moves ahead with plans to begin the purchases next year. Skeptics include Yves Mersch, a Luxembourg national and member of Mr. Draghi’s inner circle, as well as Klaas Knot, head of the Dutch central bank.

While open disagreements on policy are common in more established central banks such as the Federal Reserve, such mass, public dissension on the ECB council would be a first in its young 15-year history, and a sign of just how controversial the move to buy government bonds has become.

“Unconventional measures have one thing in common. Starting them is easy but exiting from them is difficult. And there are always undesirable side effects,” José González-Páramo, a Spanish national and former member of the ECB’s governing council, told Handelsblatt in an interview.

Nevertheless, Mr. González-Páramo agreed with Mr. Draghi’s line that the ECB must do what it takes to convince markets that euro zone inflation will return to the ECB’s target of just under 2 per cent. The ECB “must be committed to fulfilling its mandate,” he said.


Weidman Merkel HB
The Germans: Jens Weidmann of the Bundesbank, the ECB’s Sabine Lautenschläger and Chancellor Angela Merkel. Source: Handelsblatt/Jose Giribas/


But just because the ECB has to be seen doing something doesn’t mean it is the right move, Germany’s Ms. Lautenschläger argued over the weekend.

“The large-scale purchase of securities, including government bonds, is often seen as a panacea,” Ms. Lautenschläger said at a conference in Berlin. What might have worked for one region of the world might not work in Europe’s more fragmented financial system, she asserted. “With regard to the purchase of government securities, measures which are obvious in one place could be the last resort at best for us,” she said.

Instead, she prodded the ECB to continue using other measures that could be more effective in Europe’s bank-heavy financial system – such as providing cheap long-term loans to banks – and to keep up the pressure on euro-zone governments to reform their economies and make them more growth-friendly.

Private economists polled by Handelsblatt – part of an established group known as the Shadow Council, who meet once a month – expressed serious doubts that the program will have the desired effect of reviving the economy, or even reviving inflation.

“The large-scale purchase of securities, including government bonds, is often seen as a panacea.”

Sabine Lautenschläger, Member of ECB governing council

Janet Henry, an economist with the British bank HSBC, said the euro zone’s chief problem is weak investment. Jörg Krämer, chief economist at Commerzbank, warned that quantitative easing risks creating asset-price bubbles in the financial sector and destroying incentives for governments to reform.

Silvain Broyer, an economist with the French bank Nataxis, noted that the ECB would have to buy government bonds according to the size of its 18 members. That means every fourth government bond would have to be bought from Germany – the largest and most stable of the euro zone’s 18 economies.

But even in those euro zone economies that are struggling, the effect is likely to be limited. Ms. Lautenschläger pointed out over the weekend that yields for government bonds across the continent are already at historic lows. Reducing these yields further is unlikely to do much good.

When the U.S. Federal Reserve launched its own quantitative easing plan following the 2008 financial crisis, 10-year U.S. treasury bonds were selling with a yield of 4 per cent. By contrast, 10-year German bonds are currently being sold for less than 0.8 percent, but even Spanish 10-year bonds are running at a record low of 1.8 percent. While the tough austerity measures in the country have revived growth, it hasn’t has much of an impact on unemployment which is almost 25 percent.

Shadow Council


This leads many to believe there is an alternative motive in the ECB’s actions – to lower the value of the euro currency. The idea is to increase the cost of imports – and thereby raise inflation. But even here, economists are skeptical. “Indebted households and companies need higher consumer prices and higher incomes, not higher import prices and higher living costs,” argued José Alzola of the consulting firm Observatory Group.

And yet, the increasingly public spat risks destroying the credibility of the ECB. If Germany doesn’t soften its position, Mr. Draghi may have no choice but to push the decision through regardless. If a majority of the ECB’s members favor action, Germany’s central bankers should be careful not to impose their views on others, Mr. González-Páramo warned.

“I think it is in the interests of everyone that we have a strong central bank. And when the differences in opinion spill out into the public, we weaken the central bank,” he said.


Norbert Häring is an economist by trade and writes about monetary policy and economics for Handelsblatt in Frankfurt. Jens Münchrath is an editor who leads Handelsblatt’s monetary policy coverage out of Düsseldorf and Christopher Cermak covers economic and financial issues for the Handelsblatt Global Edition in Berlin. To contact the authors:; and 

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