International Business By Compromise and Persuasion, Draghi Won Grudging Support for E.C.B.’s Bond Buying By JACK EWING JAN. 23, 2015 DAVOS, Switzerland — The economist Hans Werner-Sinn, guru of German inflation militants, accused the European Central Bank of illegal money printing. The Frankfurter Allgemeine newspaper said the central bank was destroying trust in the euro. And a German citizens’ group threatened to sue. But beyond that predictable response from bastions of conservative economic orthodoxy, German political leaders reacted with restraint Friday to the European Central Bank’s decision a day earlier to begin buying large quantities of eurozone governments’ bonds to stimulate the region’s economy. Whatever their private sentiments, Chancellor Angela Merkel and other top German policy makers held their tongues in the interests of European unity. The same was true in other countries where skepticism about the central bank’s move was high, like the Netherlands. That is good news for Mario Draghi, president of the European Central Bank, because it suggests the bond purchases, known as quantitative easing, will not cause a big rift in the eurozone, as many had feared. And it is not just luck, but the outcome of Draghian diplomacy. Mr. Draghi was unable to get Germany’s complete buy-in on the plan, which calls for buying 1.1 trillion euros, or $1.2 trillion, of government bonds and other assets by the end of September 2016, in a bid to drive down market interest rates and encourage lending. But he did get German officials’ grudging acquiescence. That was the result of months of careful persuasion, according to people with knowledge of the central bank’s inner workings. It also reflects Mr. Draghi’s willingness to compromise, albeit to an extent that some critics say could blunt the effectiveness of the stimulus program. By agreeing not to assume the full risk of any country’s defaulting on its bonds, for example, the central bank has diluted its own power as the eurozone’s ultimate financial backstop. Mr. Draghi’s diplomatic outreach included a Jan. 14 visit to Ms. Merkel in Berlin. While representatives of both officials would not say what was discussed, on the basis of Ms. Merkel’s statements since then, it appears that Mr. Draghi calmed some of her fears. On Friday, during a visit with the Italian prime minister, Matteo Renzi, in Florence, Ms. Merkel repeated a sentiment that she had expressed on Thursday in Davos — that the European Central Bank action should not be an excuse for eurozone leaders to slacken their own efforts to improve their countries’ economic performance. Once again, she did not criticize the central bank. Wolfgang Schäuble, Ms. Merkel’s blunt-talking finance minister, on Friday also avoided criticizing the European Central Bank. The central bank’s independence is more important than German objections, he said during a panel discussion here in Davos at the World Economic Forum. Even Jens Weidmann, president of the Bundesbank and a longtime critic of quantitative easing, avoided expressions of outrage that could have inflamed German taxpayers — who fear that they will pay the bill if the European Central Bank buys bonds of another eurozone country that later defaults. Mr. Weidmann, a member of the European Central Bank’s Governing Council was one of the minority of council members who did not support the bond-buying plan, according to people involved in the discussions. In an interview published on Friday in Bild, a splashy daily newspaper that German leaders often use as a vehicle to speak to the common man, Mr. Weidmann said he feared that the Draghi program would take pressure off other European countries to overhaul their economies. Crucially, though, he did not say that bond-buying would be illegal, as he has in the past. Mr. Draghi helped defuse German opposition by agreeing to a compromise that is supposed to limit the risk to German taxpayers if a country does not pay its debts and the central bank suffers losses. Most of the risk from purchases of eurozone government bonds will, in theory, remain with the respective national central banks. Some economists say that decision undermines the idea of a single currency with strong central bank, and could weaken the credibility of the stimulus program. “Before this decision, nobody could have questioned whether monetary policy is ‘single, ” Guntram B. Wolff, the director of Bruegel, a research organization in Brussels, said in a blog post on Friday. “Now, investors can rightly ask that question.” The Germans were not the only ones in favor of distributing the risk. Even some members of the Governing Council in favor of quantitative easing were concerned that the central bank’s bond-buying would make eurozone countries responsible for one another’s debt. Mr. Draghi said at a news conference on Thursday that there was a consensus in favor of risk-sharing among the national central bank heads who sit on the Governing Council. Mr. Draghi and other members of the central bank’s executive board also went on a charm offensive in Germany in recent weeks, giving interviews to local newspapers. Mr. Draghi, who has rarely said much in public about his private life, gave an interview to a German weekly newspaper in which he spoke about losing his parents as a teenager and working to support his studies at the Massachusetts Institute of Technology. He told a story that seemed calculated to impress upon German readers his commitment to prudent fiscal practices. Mr. Draghi’s parents left a small inheritance for the children, he told the newspaper, which disappeared “into thin air” after they invested in Italian treasury bills with a fixed interest rate during a time of high inflation. On Friday, Benoît Coeuré, a French member of the six-member European Central Bank executive board, described the bond-buying program in terms designed to appeal to German fixation on inflation and following the rules. The point of quantitative easing, he said in an interview in Davos, was to push inflation — minus 0.2 percent in December — back toward the central bank’s target of below, but close to, 2 percent. “There was a sense that the credibility of the institution would be challenged if we did not act to confirm our definition of price stability,” Mr. Coeuré said in Davos. “We had to act.” Behind the scenes in the months leading up to Thursday’s action, Mr. Draghi and other top E.C.B. officials also succeeded in getting critics to tone down their rhetoric. For example, Sabine Lautenschläger, a German member of the central bank’s executive board, said in an interview with the magazine Der Spiegel earlier this month that she did not think conditions were yet grave enough to warrant government bond purchases. But Ms. Lautenschläger did not rule out supporting that option in the future, an indication she did not think that bond-buying would be a violation of the central bank’s charter, as some opponents have argued. Popular opposition to quantitative easing could still build in Germany. And there could be tension among top political leaders over what some see as a failure to back up European Central Bank action with measures to improve the performance of their economies, such as streamlining government approval processes for business. “Europe at the moment is simply not competitive,” Mark Rutte, the Dutch prime minister, said in a panel discussion in Davos on Thursday before the central bank’s decision. “My big worry is that we will slow down in terms of fiscal and structural reforms.” In an implicit swipe at France and Italy, Mr. Rutte said, “Some of our biggest members are still debating the necessity of this recipe. But if Germans were upset about the European Central Bank’s decision, they could take consolation in the fact that the country’s benchmark DAX Index reached a new high on Thursday, after Mr. Draghi announced the plan — and then set another on Friday. “Whatever is good for the eurozone economy is good for Germany,” Mr. Coeuré said. “The German economy is not in a vacuum.”
Posted on: Sat, 24 Jan 2015 00:08:35 +0000
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