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Oct 24, 2019

Europe Politics: Mario Draghi’s Last Hurrah Clouded by Divisions at E.C.B.

By Jack Ewing



Business|Mario Draghi’s Last Hurrah Clouded by Divisions at E.C.B.
The central bank president oversaw his last monetary policy meeting. Christine Lagarde, his successor, may face a revolt by opponents of his easy money policies.

CreditRalph Orlowski/Reuters
Jack Ewing
FRANKFURT — Mario Draghi presided over his last monetary policy meeting as president of the European Central Bank Thursday, his legacy as savior of the eurozone clouded by divisions among the bank’s policymakers that have burst into the open in the final months of his tenure.
Christine Lagarde will be sworn in as Mr. Draghi’s successor on Tuesday, and immediately confront a revolt by members of the bank’s Governing Council who believe the bank’s easy money policies have created asset bubbles and set the stage for a financial crisis.
The Governing Council did not make any changes to monetary policy at the meeting on Thursday, six weeks after it took action to head off recession in the 19 countries in the eurozone.
But an increasingly vocal faction on the council contends that measures designed to push down market interest rates went too far. They say low interest rates, which have fallen below zero for many government bonds, have encouraged irresponsible borrowing.
In September, the council cut the rate banks pay to park money at the central bank to minus 0.5 percent from minus 0.4 percent. The negative interest rate is essentially a penalty on lenders that hoard cash. The council also decided to resume purchases of government and corporate bonds, a way of pushing down market interest rates and making credit cheaper.
These decisions inspired an unusually open backlash from some members of the Governing Council, from countries including Germany and the Netherlands, who believe they were unnecessary and reckless.
Klaas Knot, the president of the Dutch central bank, said the measures were “disproportionate to the present economic conditions.”
“There are increasing signs of scarcity of low-risk assets, distorted pricing in financial markets and excessive risk-seeking behavior in the housing markets,” Mr. Knot said in a statement in September.
Until recently, the dissenters expressed their feelings discreetly, while Mr. Draghi insisted that key decisions by the central bank were backed by consensus. Unity is important to a central bank’s credibility and its ability to influence financial markets. And it was essential during the novel and extraordinary measures introduced on Mr. Draghi’s watch that are seen as having prevented the eurozone from collapse during a severe debt crisis that began in 2010.
The dissenters appear to be taking advantage of the leadership transition to stake out their views while Ms. Lagarde is new in the job and has not had a chance to establish her authority.
Ms. Lagarde will soon acquire a potential ally in this debate. The German government on Tuesday nominated Isabel Schnabel, a member of the German Council of Economic Experts, to a vacancy on the central bank’s Executive Board. If confirmed, Ms. Schnabel will replace Sabine Lautenschläger on the six-person board, which is part of the Governing Council and manages the operations of the central bank.
Ms. Lautenschläger resigned last month. She did not give a reason, but is widely assumed to have been unhappy with the central bank’s course. She was also the only woman on the 25-person Governing Council, a gender imbalance that was a focus of a conference at the bank’s headquarters on Tuesday. Ms. Schnabel’s appointment, and the arrival of Ms. Lagarde, brings that number to two.
In contrast to much of the German economics establishment, Ms. Schnabel, a professor of economics at the University of Bonn, is regarded as a supporter of the policies pursued under Mr. Draghi.
The decision last month to increase stimulus was a response to signs of an economic slowdown caused by trade war, Brexit and conflict in the Middle East.
But even some economists who supported those measures have become concerned that cheap credit is creating real estate bubbles.
Central bank policies “made an essential contribution to economic recovery after the global financial crisis and the eurozone debt crisis that followed,” Jürgen Michels, chief economist at the German bank BayernLB, said in a commentary published Thursday by the Ifo Institute for Economic Research in Munich. “As time goes on the stimulus effect of these policies decreases, and negative factors get the upper hand.”
Jack Ewing writes about business, banking, economics and monetary policy from Frankfurt, and contributes to breaking news coverage. Previously he worked for a decade at BusinessWeek magazine in Frankfurt, where he was European regional editor. @JackEwingNYTFacebook

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