The Growing Opposition Against the ECB

by
Claudio Grass
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Few investors and market observers were really surprised when Mario Draghi announced the ECB’s next massive easing package in mid-September. Cutting rates further into negative territory and the revival of QE were largely expected sooner or later, as the “whatever it takes” outgoing ECB President is now faced with a wide economic slowdown in the Eurozone. After all, over the last decade, the ECB has proved to be a “one-trick pony”, with negative rates and bond-buying being used as a cure-all and as the means to reach that ever-elusive 2% inflation target. Thus, the markets had already taken the new intervention for granted and that was reflected in the lukewarm reaction to its announcement. However, what was much less expected was the series of objections, challenges and even resignations, that both preceded and followed the decision.

Recent reports have revealed rising tensions and exposed a very deep and wide rift within the ECB. According to the Financial Times, President Draghi ignored the advice of the ECB’s own officials, even as they vehemently protested and warned against the new easing package. As the article described, “the bank’s monetary policy committee, on which technocrats from the ECB and the 19 Eurozone national central banks sit, advised against resuming its bond purchases in a letter sent to Mario Draghi and other members of its governing council days before their decision”. A few days after the new measures were announced, Sabine Lautenschlaeger, Germany’s appointee to the board of the central bank and an outspoken critic of its policy direction, resigned from her position, in a move that many saw as a protest. This level of dissent and discord at the top of the ECB have never been seen before during Draghi’s tenure, while the announcement marks one of the very rare occasions upon which the committee’s position has been ignored in the last 8 years.

The main argument against the revival of QE at this stage was that it would be much wiser and more prudent for the central bank to wait and to “keep its powder dry” for an emergency, such as a no-deal Brexit, or to fight off an acute recession. This opposition came, among others, from the governors of the Bank of France, Germany, the Netherlands, Austria and Estonia, representing more than half of the euro area’s economic output and population. For many critics, this fact alone suffices to question the mandate and the legitimacy of the ECB’s decisions.

Of course, the opposition to the ECB’s policy direction is not limited to officials within the bank itself or to the central bankers at the center of this debate. Attacks from multiple fronts, that have been on the rise for years already, have intensified dramatically after the announcement of the new package. Oliver Bäte, the CEO of Allianz, Europe’s biggest insurer, did not mince his words and called out the politicization of monetary policy in the euro area. He also sharply criticized the ECB’s policies for “making it easy for people to spend money they don’t have” and for “multiplying risk” by reinforcing the “doom loop” of banks’ investments in government debt. Christian Sewing, the Deutsche Bank CEO, seems to concur, as he recently warned that negative rates will “ruin the financial system”.

A group of former senior central bankers also recently released a memo outlining the reasons behind their emphatic opposition to the ECB’s new easing measures. The memo, signed by numerous German, French, Austrian, and Dutch former central bank officials and chief economists, claimed the easing decision was “based on the wrong diagnosis”. It also went on to echo the widespread concerns over the ECB’s politicization by pointing out that “from an economic point of view, the ECB has already entered the territory of monetary financing of government spending, which is strictly prohibited by the [Maastricht] Treaty.”

This fiery conflict on this level foreshadows a very bumpy ride ahead for incoming President Christine Lagarde. She has repeatedly expressed her support for Mr. Draghi’s approach in the past and is widely expected to continue down that same path, especially as she will be faced with a widening economic slowdown in the region once she takes over at the end of October. However, from a bigger-picture perspective, this sharp discord more than anything serves to highlight the level of discontent with the central bank’s ultra-loose policies and the toxic effects they have already had on banks, on insurers, on pension funds and, of course, on individual citizens and savers.

While we can still expect to see “more of the same” in terms of monetary policy, it is important to note that a growing resistance is gaining traction, which is likely to intensify as the impact of these policies is being felt, not just by the banks, but by the average citizen, who increasingly sees their savings shrink and their retirement planning become near-impossible. No matter how this conflict is ultimately resolved, a reversal of these deleterious measures is definitely not in sight. Thus, for the foreseeable future, physical precious metals continue to present the safest and the most reliable hedge against economic, monetary and systemic risks.