Germany takes aim at ECB policy

German Finance Minister Schaeuble addresses a news conference on German government's estimated tax revenues in 2016, in Berlin
German Finance Minister Wolfgang Schaeuble in Berlin, Germany, November 5, 2015. REUTERS/Hannibal Hanschke

November 11, 2015

BERLIN (Reuters) – The German government’s panel of economic advisers said on Wednesday the European Central Bank’s low interest rates were creating substantial risks, and Finance Minister Wolfgang Schaeuble warned of a “moral hazard” from loose monetary policy.

The double-barrelled message came after Reuters reported on Monday that a consensus is forming at the ECB to take the interest rate it charges banks to park money overnight deeper into negative territory at its Dec. 3 meeting.

The ECB raised the prospect last month of more monetary easing to combat inflation which is stuck near zero and at risk of undershooting the ECB’s target of nearly 2 percent as far ahead as 2017 due to low commodity prices and weak growth.

But Schaeuble, a 73-year-old veteran who solidified his cult status within the conservative wing of Chancellor Angela Merkel’s party with his tough stance on the Greek crisis, said loose monetary policies risked creating false incentives and eroding countries’ willingness to reform their economies.

“I have great respect for the independence of the central bank,” he said at an event in Berlin on European integration.

“But I tell the central bankers again and again that their monetary policy decisions also have a moral-hazard dimension.”

Earlier, the German government’s panel of economic advisers said the ECB’s low interest rates were creating substantial risks for financial stability and could ultimately threaten the solvency of banks and insurers.

The euro zone central bank embarked on a trillion-euro-plus asset-buying plan in March to combat low inflation and spur growth, and is widely expected to expand or extend the scheme next month. But the advisers urged it not to ease policy again.

“There are no grounds to force the loose monetary policy further,” Christoph Schmidt, who heads the group, told a news conference.

With regard to the ECB’s bond-buying program, he added: “We have come to the conclusion that a slowdown in the pace is called for. At least, the ECB should not do more than planned.”

The council of economic experts, presenting its annual report, criticized the policies of the ECB in unusually stark language, saying it was creating “significant risks to financial stability”.

“If low interest rates remain in place in the coming years and the yield curve remains flat, then this would threaten the solvency of banks and life insurers in the medium term,” the council noted in the report.

“The ECB is not taking the looming risks to financial stability into account in its monetary policy decision-making.”

The advisors also said the Federal Reserve should have begun tightening its monetary policy as the U.S. economy recovers following the global financial crisis.

“In our view, the Fed has already waited too long,” panel member Volker Wieland told the news conference.

In its annual report on the state of the German economy, the group of five economists known as the “wise men” — which now includes one woman — forecast growth of 1.7 percent this year and 1.6 percent in 2016.

It described the costs of the refugee crisis as “manageable” for the German government, estimating that the influx would lead to additional public outlays of up to 8.3 billion euros in 2015 and up to 14.3 billion euros next year.

(Reporting by Gernot Heller; Writing by Noah Barkin and Paul Carrel; Editing by Madeline Chambers and Catherine Evans)