Divisions at the heart of the European Central Bank over last week’s rate cut have revived fears in Frankfurt of a German popular backlash against the bank’s policy making, even as the ECB faces decisions critical to the eurozone’s future.
People involved in the policy debates said divisions between northern and southern representatives on the ECB board have been mounting since market pressures on the eurozone relaxed, with council members freed up to revert to national interests.
Last week, two German members of the ECB’s 23-member governing council led a six-man revolt against Thursday’s move to cut the bank’s benchmark lending rate by 25 basis points. The cut was quickly followed by public broadsides from Germany’s influential conservative economist Hans-Werner Sinn and some mainstream financial media.
Among those who voted with the two Germans on Thursday were the heads of the Dutch and Austrian central banks. One senior official said at least a quarter of the governing council is splitting from Mario Draghi, ECB president, on many major policy initiatives.
Officials said the bank’s leadership was even more concerned that growing anti-ECB sentiment in Germany could hamper Mr Draghi’s ability to move aggressively against signs of deflation and on other issues sensitive to Berlin. These include the future of the EU’s “banking union” and the provision of new cheap long-term loans to struggling eurozone banks.
“This indeed can be a problem for the coming difficult decisions,” said one person involved in the discussions. “It shows a big problem: that the ECB is heavily losing trust and confidence in the largest country of the euro area, namely Germany.”
Another person who has spoken with board members said the increasing anti-Italian bent of some ECB criticism in Germany was of particular concern. Mr Draghi is a former head of the Bank of Italy and the country is projected to end the year with the deepest recession of any of the five largest eurozone economies.
In an interview at the weekend with Bild, Germany’s largest-circulation daily, Mr Sinn accused Mr Draghi of cutting the rate to help borrowers in the south who could not otherwise get low-priced loans, an apparent reference to Italy. “Draghi abused the euro system by giving cheap loans to the southern countries, of the kind that they would not get on the capital market,” Mr Sinn said.
A commentary by the chief economist of the financial weekly Wirtschaftswoche called the decision a “diktat from a new Banca d’Italia, based in Frankfurt”.
Mr Draghi has won plaudits for resolving differences between Germany and the ECB over the bank’s eurozone crisis response. Two years ago, Jürgen Stark, then German member of the ECB executive board, and Axel Weber, head of the German central bank, resigned over the bank’s purchase of struggling eurozone countries’ sovereign bonds.
Although Jens Weidmann, Mr Weber’s Bundesbank successor, has publicly opposed Mr Draghi’s bond-buying plan, Mr Stark’s successor, Jörg Asmussen, backs the plan. Despite voting with Mr Weidmann against the rate cut, he is seen as a key bridge between Mr Draghi and Berlin.
Angela Merkel, the German chancellor, backed Mr Draghi on outright monetary transactions, but during an election rally in April, she said Germany would need an interest-rate increase if its economy were taken in isolation.
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