New normal

Stop Helping Us, Please

Siemens-Generatoren
Germany's economy is spinning along nicely with help from the ECB. Source: Martin Schutt/dpa

Germany’s economists agree: Whoever wins the country’s federal election later this month can bank on decent growth numbers for the next few years. Europe’s largest economy is seen growing at an annual pace of around 2 percent this year, and probably in 2018 and 2019, too.

That was the consensus of the country’s four leading economic institutes, who released updated forecasts this week. Considering that Germany is near full employment, rather than on a rebound out of a crisis, the growth numbers are even more impressive.

Economists know who they have to thank, at least in part. “The monetary policy of the ECB is giving the German economy a clear push,” said Roland Döhrn of the RWI economics institute. A rebound in global trade is helping the country’s export-heavy economy too, even if it may be at the cost of others. Germany is set to post the world’s largest trade surplus for the second year running, according to the Munich-based Ifo Institute, although the surplus is seen falling slightly as a percentage of Germany’s economic output (from 8.3 percent in 2016 to 7.9 percent in 2017).

But it’s not just Germany that’s benefiting. The 19-nation euro zone is expected to grow at 2.2 percent this year, according to the European Central Bank’s latest forecasts, which would mark the highest pace since 2007. Political threats to Europe’s economic health (think French elections) have also dissipated in the past few months.

In short, things are humming along just fine. Which is why German policymakers, once again, were frustrated with European Central Bank President Mario Draghi’s press conference on Thursday.

Mr. Draghi's plea for time was expected, but that hasn't stopped the usual chorus of uproar from Germany.

After a meeting of the ECB’s decision-making governing council, Mr. Draghi faced the press with a simple message: Ask me again in October. It was a (non) message that most economists saw coming. Mr. Draghi wants time to think about how to carry out his next move in monetary policy. The ECB’s boss said he tasked relevant committees to come up with options by next month.

While the European Central Bank is widely expected to start winding down a massive bond-buying program – one that has involved buying about €60 billion per month, and more than €2 trillion in the past two years – at the start of next year, the question of exactly how that is done is a rather sensitive matter.

Much speaks for ending the ECB’s unprecedented injection of cash into the economy. In short, the central bank has arguably achieved its goals: Growth in the 19-nation euro zone is running at a high clip, and there are even legal and practical reasons why the ECB can’t buy bonds much longer.

Not so, says Mr. Draghi. Appearing before the press, he said that a majority of the ECB’s governing council had concerns about the rise of the euro, which tested the $1.20 mark and is at its highest level in 18 months. A number of members also complained that inflation in the euro zone remains stubbornly low. The ECB predicts inflation will average 1.5 percent this year and 1.2 percent in 2018, well below the central bank’s target of “close to but below 2 percent.”

Mr. Draghi’s plea for time may have been expected (the council mulled over a variety of options, he said, even if he didn’t talk about them publicly) but that hasn’t stopped the usual chorus of uproar from Germany. For months, policymakers here have clamored for the ECB to start telegraphing the end of its unprecedented program to revive the Continent’s economy, launched at a time when the euro zone was in deep crisis.

EZB-Pk in Frankfurt
German patience with Mr. Draghi is wearing thin. But then it has been for a while now. Source: Arne Dedert/dpa

That chorus grew particularly loud at an annual banking conference hosted by Handelsblatt in Frankfurt this week. One by one, bankers ranging from Axel Weber of UBS (former boss of the Bundesbank) to Deutsche Bank’s John Cryan stood up to warn that the central bank’s policies were undermining their business models and even, potentially, creating financial risks for the broader economy by pushing investors into riskier products in search of yield. Perhaps the only outlier was Goldman Sachs CEO Lloyd Blankfein.

It’s true that cutting the ECB’s programs to stimulate the economy could reduce growth. Two of the four German institutes that issued updated forecasts this week predicted the country’s economic growth would slow somewhat to around 1.6 percent in 2019, because the ECB will almost certainly be forced to start raising interest rates by then. Many Germans argue that’s a price worth paying to avoid a bubble, and point to signs that the German economy can handle the tougher conditions.

“While financial markets and the ECB are getting increasingly concerned about the strength of the euro, the country which often claims to be export world champion is still enjoying a strong export recovery,” said Carsten Brzeski, chief Germany economist for ING.

Whether the rest of the euro zone can handle such tougher conditions is another matter. In the end it comes down to a rather simple question of perspective. Many Germans argue that, with their economy on solid ground, the financial risks of the ECB’s easy-money policies have come to outweigh the gains in additional economic growth. Mr. Blankfein of Goldman Sachs this week suggested exactly the opposite: “The consequences of raising rates too quickly too early are more dramatic than the consequences of waiting.”

Whichever side is right, one thing seems clear: Come October, Mario Draghi won’t be able to dodge any more questions.

Christopher Cermak, an editor currently based in Washington DC, reported and adapted this story for Handelsblatt Global. Jan Mallien, Frank Wiebe, Norbert Häring and Donata Riedel of Handelsblatt contributed reporting to this story. To contact the author: cermak@handelsblatt.com

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