There are few fights less dramatic than one launched over the drab subject of macroeconomic policy. But even if the latest infighting and backbiting between rival camps at the European Central Bank isn’t all that thrilling, it is significant.
The public snipes come on the heels of a surprise rate cut at the ECB last week, to which a sizable minority of the central bank’s interest rate-setting committee voted no.
The ECB keeps the details of its interest-rate deliberations secret, so it takes a while for the backstory behind interest rate decisions to leak out. By most accounts, up to six of the ECB’s 23-member governing council voted against the recent cut, including two Germans, an Austrian and a Dutchman (yes, that lineup that begs for a cheesy joke). A similar bloc was reportedly opposed to the previous rate cut in May, joined by the council’s Finnish representative.
In almost all cases, the leader of the faction against more monetary stimulus is cited as Jens Weidmann, president of Germany’s central bank, who has opposed various European stimulus measures in the past. In the other camp pushing for more monetary stimulus to boost economic growth are ECB president Mario Draghi, an Italian, joined by France’s central bank governor Christian Noyer.
There’s a notable north-south divide in interest-rate preferences, which is mirrored by the relative strength of the economies, employment and inflation of the various countries. This divide also applies—it seems—to the six members of the (ostensibly non-aligned) executive board of the ECB, who vote on rates alongside the euro zone’s 17 national central bank presidents.
As is often the case at European institutions, this leads to mutterings about officials putting their national interests ahead of what’s good for the euro zone as a whole. Hans-Werner Sinn, the outspoken president of the German Ifo Institute think tank, took to the tabloids this weekend (link in German) to criticize Draghi’s “abuse” of the euro zone, “giving cheap loans to the southern countries.” When the latest reading of euro zone GDP is released later this week, Italy is expected to be the weakest of the region’s large economies, fueling the suspicions of those who read ulterior motives into Draghi’s actions. For his part, Italian prime minister Enrico Letta called the rate cut “great news.”
Some anonymous officials try to play down the disagreement at the ECB’s rate-setting council as simply a matter of timing rather than a deep divide on whether to cut rates or not. Other analysts see the rate cut despite internal opposition as a sign of a mature, independent institution breaking free from political concerns, “driven by economic fundamentals in a fashion reflecting its status as a more normal central bank.”
In Europe, even the economic fundamentals—like inflation—are highly politicized, given the wide divergence in performance between euro zone countries and the patchwork of policymaking powers ceded and shared between countries. Until a true European identity is forged, perhaps the only defense against national bias is the one taken by ECB chief economist Peter Praet, who reportedly proposed the recent rate cut; he is a French-speaking Belgian with a German mother.