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Sunday, October 15, 2017

Germany loses patience with monetary policy

In its day, the policy of negative rates of the ECB was scandalized in Germany and it is widely believed in the Teuton country that the Draghi bond purchase operations, as of March 2015, are covert European subsidies to the indebted southern countries, to expense of the long-suffering north savers. For months and months, German authorities and experts cried out in the desert, unable to assimilate the idea of ​​a Europe of free money. The Bundesbank charged the ink on the effects that the purchase of negative yield bonds would have on the balance sheet of the ECB, although the fact is that, to date, these losses are below the income from the negative deposit rate.

Senior German banking executives such as Deutsche Bank chief John Cryan blamed zero rates on the low profits of European banks and their loss of competitiveness against US rivals. Politicians such as Markus Söder, Bavarian regional finance minister and destined to play a greater role in the upcoming Berlin Coalition Jamaica, which adds to conservatives, liberals and greens, called the situation "disastrous" and publicly demanded that 'The ECB starts increasing interest rates, step by step, as soon as possible'. Mario Draghi, however, has consistently been making deaf ears to this rosary of lamentations. Until Merkel spoke.

The Chancellor has managed the thorny crisis of the euro using two financial talents who, with stick and carrot, have been shepherding the European economic actors until they return to the fold. A bad cop in the Eurogroup, Wolfgang Schäuble, strictly disciplining the wasteful partners, and a good cop at the head of the ECB, Mario Draghi, injecting a huge amount of liquid into the system that otherwise would not have been able to to withstand such tension. Merkel fully supported Schäuble's toughness and let Draghi do it, without uttering a single statement contrary to his XXL laxity policy for years. But once overcome the worst of the crisis and facing a legislature focused on the "refoundation of Europe" that Merkel will carry out with Macron, this move was obsolete, so, before the summer break and in an apparently inoffensive visit to a secondary school that journalists had not bothered to attend, Merkel ruled that the euro was "too weak" by monetary policy. Hearing from the kitchen, Draghi announced in September that "decisions will likely be taken in October" and, after a test of resistance, announces now that interest rates are well managed in most entities, so they will not need more capital when rates start to rise. But the movement of German plug goes further and includes the replacement of the Italian by a man of the Bundesbank that happened to a new era less exceptional, more homologable. Jens Weidmann has for months avoided publicly the harsh criticism he gives Draghi privately for a more moderate profile, which facilitates his landing at the ECB. Germany has given its plácet to a Spanish in the vice-presidency, as a perfect alibi of the monetary hardening, and certainly would be a great advance for De Guindos, because it would charge five times more than as minister, but we can not think that for that reason Spain is going to exert a decisive influence on Weidmann's policy. Here the only question is how far are the guys going under German reins.

Some analysts apply Taylor's Rule, a Stanford economist, who plays with real inflation and economic activity to calculate the rates that lead to full employment, and deduce that some types agree to Germany ... to 7.8 %! But that calculation forgets that, although the German public debt is the lowest in the Eurozone (68%), the Bundesländer sum an average of 160%. Although in 2016 all but one closed with a budget surplus, the fact remains that they still mark the German pain threshold for rate rises.

Weidmann has also been critical of Macron's proposals to relaunch the economy. And Christian Lindner, a liberal leader about to form a government with Merkel, is keen to return to orthodox monetary policy, which will undoubtedly create new tensions in Brussels. But all of them are tokens of a new move to strengthen Europe, which is the high priority of the next legislature of Merkel, so their movements are part of a set that can only be valued in its entirety.

Pressure on Draghi
The International Monetary Fund (IMF) said this week in its latest report on the world economy that financial bubbles are occurring as a result of the long period of monetary stimulus, a message to the ECB to put an end once and for all.

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