There was a time when the German chancellor and the head of the European Central Bank had nice things to say about each other. Mario Draghi spoke of a "good working relationship," while Angela Merkel noted "broad agreement." Draghi, said Merkel, is extremely supportive "when it comes to European competitiveness."
These days, though, meetings between the two most powerful politicians in the euro zone are often no different than their face-to-face at the most recent summit in Brussels. She observed that his forced policy of cheap money is endangering the business model of Germany's Sparkassen savings banks and retirement insurance companies. He snarled back that the sectors would simply have to adapt, just as the American financial sector has.
The alienation between Germany and the ECB has reached a new level. Back in deutsche mark times, Europeans often joked that the Germans "may not believe in God, but they believe in the Bundesbank," as Germany's central bank is called. Today, though, when it comes to relations between the ECB and the German population, people are more likely to speak of "parallel universes."
ECB head Draghi doesn't understand why he is getting so much resistance from the country that has profited from the euro more than any other. Yet Germans blame Draghi for miniscule yields on savings accounts and life/retirement insurance policies. Frustration is growing.
Draghi has pushed the prime rate down to zero and now even charges commercial banks a fee for parking their money at the ECB. He has also bought almost €2 trillion worth of bonds from euro-zone member states, making the ECB one of the largest state creditors of all time.
During his most recent appearance before the Frankfurt reporter pool, he went even further. The idea of pumping money directly into the economy, he said, was a "very interesting concept," with a helicopter to distribute the money across the country if necessary, as economists have half-jokingly recommended. Doing so is seen as a way of boosting the economy. German money being thrown out of a helicopter: It would be difficult to find a more fitting image to show people that the money they have set aside for retirement may soon be worth very little.
The criticism of Draghi had already been significant, but his public ruminations about so-called "helicopter money" have magnified it to extreme levels. Even economists that tend to back the ECB, such as Peter Bofinger, who is one of Merkel's economic advisors, are now accusing Draghi of constantly "pulling new rabbits out of the hat." Leading representatives of the banking and insurance sectors are openly speaking of legal violations. And strategists within Merkel's governing coalition, which pairs her conservatives with the center-left Social Democrats (SPD), are concerned that Draghi is handing the right-wing populist Alternative for Germany (AfD) yet another issue where they can score points with the voters. There is hardly any other issue that enrages Germans at town meetings and political party conventions as much as the disappearance of their savings due to the "unconventional measures" adopted by the ECB in Frankfurt.
By now, the growing dismay has been registered in the Chancellery. Merkel is also critical of Draghi's zero percent interest policy, but she is afraid of making public demands that she may not be able to push through. Still, she is convinced that Draghi must give greater weight to German concerns, so she has resorted to telephone conversations and closed-door meetings to make her case.
Economics Minister Sigmar Gabriel, who is also head of the SPD and vice chancellor, has likewise refrained from publicly criticizing Draghi. Instead, he says it was the "inaction of European heads of government" that has transformed the ECB into "a kind of faux economic government." But Draghi's most recent decision to make money in the euro zone even cheaper has been heavily criticized within Gabriel's Economics Ministry. "It jeopardizes the trust of all those who work hard to establish a small degree of prosperity or a nest-egg for retirement," says one ministry official. "Plus, the cheap money hasn't helped get the economy back on track."
Most dangerous for Draghi, however, is the displeasure from the German Finance Ministry. A few weeks ago, Finance Minister Wolfgang Schäuble warned the ECB head that his ultra-loose monetary policies could "ultimately end in disaster." The fact that Schäuble said anything at all is rather surprising, as were the words he chose. Out of respect for the ECB's independence, finance ministers tend not to comment on decisions made by the central bank.
The Legal Boundary
But Schäuble believes Draghi's course is calamitous. He is concerned that the unchecked creation of money could lead to new bubbles on the financial markets. Furthermore, negative interest rates have a negative impact on the profit margins of commercial banks -- and part of the ECB's mission is ensuring the stability of such banks. Schäuble believes that Draghi's policies create misguided incentives for the governments of euro-zone member states.
To be sure, ECB independence is also of vital importance to Schäuble as well. But that is no longer the case when the bank's policies exceed its legal mandate. It is a boundary that Schäuble believes Draghi and his people have crossed, which explains why the minister does not have a bad conscience about abandoning traditional reserve. "We have to initiate this dialogue about monetary policy," says a Finance Ministry official.
Were the ECB, as Draghi has indicated it might, to open the monetary policy gates even wider -- with, for example, helicopter money -- the German finance minister would view it as a breaking point. Such a policy would see the ECB bypass the banking sector and distribute money directly to companies, consumers or states, all of which would stand in violation of the central bank's own statutes. Should it come to that, sources in the German Finance Ministry say, Berlin would have to consider taking the ECB to court to clarify the limits of its mandate. In other words: the German government and Draghi's ECB would be adversaries in a public court case.
Such a legal battle between the government and a central bank would be a first in German history. It could lead to a constitutional crisis of unprecedented severity or to currency turbulence -- which is why it is extremely improbable that the two sides would allow the conflict to escalate to such a degree.
But the very fact that senior officials in the German Finance Ministry are considering their legal options makes it clear just how great the frustration with Draghi has become. The ECB head's ever more imaginative ideas for increasing the money supply, say Finance Ministry officials, indicate that he is only concerned about the psyche of the international financial markets and not about average German savers.
The Concerns of Savers
Following the disastrous results of the three recent state elections in Germany -- elections which saw the AfD succeed at the expense of Merkel's Christian Democratic Union (CDU) and Gabriel's SPD -- the government in Berlin has different priorities. Particularly among German conservatives -- a designation that includes the CDU as well as its Bavarian sister party, the Christian Social Union (CSU) -- worries are growing that, with the refugee crisis abating, the AfD could turn its fury on the ECB. Such a shift could cost conservatives additional voters, particularly since the concerns of savers have long been a central issue for the CDU.
Conservative floor leader Volker Kauder, a close ally of Merkel's, has warned against heaping too much pressure on the ECB. "It was the CDU and the CSU that insisted on central bank independence," he says. "We should behave accordingly."
But the mood in the party has clearly shifted. During a recent visit to his constituency, Kauder's deputy, economics expert Michael Fuchs, experienced first-hand just how concerned voters are about the interest-rate issue. One enraged man screamed at him during an event that Merkel is to blame for the low interest rates. Such anger is fertile soil for the AfD. "On this issue, it isn't easy to counter the AfD," Fuchs says. "The criticism of the ECB is justified." Merkel's coalition, he says, "must clearly say that it finds Mr. Draghi's interest rate policy to be incorrect. We haven't been loud enough."
That may soon change. The number of party allies joining in Fuchs' critique has been growing in recent weeks. Following a joint meeting in Dresden, conservative finance experts from German state parliaments issued a statement saying that Draghi's policies are undermining trust in the common currency. Ralph Brinkhaus, deputy head of the conservative party group in German parliament, says: "We have to pressure the ECB to justify its policies. Otherwise, nothing will change."
The most pointed attacks have come from the Bavarian CSU. With the refugee crisis having faded into the background, party head Horst Seehofer has made his opposition to Draghi his next major issue. Bavarian Finance Minister Markus Söder has already set the tone: "The zero-interest policy is an attack on the assets of millions of Germans, who have placed their money in savings accounts and in life insurance policies," he says.
Söder believes that emphatic critique of the ECB will bring political benefits. The ECB may be independent, but it isn't omnipotent, he says. "We need a debate in Germany about the erroneous policies of the ECB," he says. "The German government must demand a change in direction on monetary policy. If things continue as they have, it will be a boon for the AfD." Ahead of a July conclave of the Bavarian state cabinet, Söder has been charged with developing ideas for what can be done to counter Draghi's course.
'The People of Germany Aren't Stupid'
Seehofer and his people aren't just thinking about the concerns of German savers. They are also acting as lobbyists for the financial firms that have their headquarters in the Bavarian capital of Munich. Such companies are of course primarily interested in their bottom lines, but their political arguments are similar to those of the CSU: They emphasize the interests of German savers.
Nikolaus von Bomhard is one of them. Politically correct to a fault, but with a deep sensitivity to the mood of the people, Bomhard is the head of global reinsurance giant Munich Re. He recently launched a savage attack on the ECB. Because its loose monetary policy has driven up stock and real estate prices, he said, it is primarily benefiting the wealthiest people in the country. He said it was serving to redistribute wealth to the upper classes and it had become impossible to sit back and say nothing. "The people of Germany aren't stupid," he said, adding that political leadership was required.
With the smile of someone who knows he has the people on his side, Bomhard also revealed that Munich Re had set aside gold and, recently, also cash in the company's safes. It is a move that many normal Germans have already made. According to banking associations, the demand for safes and lockers has gone up as people are apparently concerned that they may soon have to pay negative interest rates to their banks, just as commercial banks must now pay the ECB.
Bomhard isn't the only one targeting the ECB. Allianz Chairman of the Board Oliver Bäte told SPIEGEL in an interview not long ago that the ECB is devaluing savers' money. Georg Fahrenschon, president of the German Savings Bank Association, warned: If low interest rates continue, increasing numbers of people will have to work until they are 70 or even longer. In March, the Association of German Banks even went so far as to commission a survey. The savings morale of Germans, the survey found, is crumbling under the low interest rates dictated by the European Central Bank.
The origins of this wave of rage are not difficult to pinpoint. There is no other sector that feels the consequences of monetary policy to the degree that insurance and banking does. It has a direct effect on their profits and, for smaller insurance companies, threatens their very existence.
Money in the Mattresses
It is mostly life/retirement insurance policies that are suffering. Insurance providers have primarily invested their customers' money in sovereign bonds. But returns are extremely low, in part because of the massive ECB purchases of such bonds. Banks, for their part, must accept certain losses because they are not able to pass on to their customers the negative interests on deposit they pay to the ECB. To offset the losses, they have raised fees, which may ultimately encourage customers to consider simply keeping their money in their mattresses at home.
That, too, is a reason for German frustration with Draghi. In hardly any other euro-zone country is the financial investment sector so dominated by savings accounts and insurance policies. But Draghi appears to have limited interest in the peculiarities of the German financial sector and the political climate in the euro zone's largest member state. The ECB head is rarely to be found in his office in the ECB tower in Frankfurt. And since the German Jörg Asmussen left the bank two years ago, there are few people left in his circle who can explain to him the complicated relationships that govern political Berlin.
Draghi has become increasingly annoyed by the constant criticism coming from Germany. He feels unjustly targeted and has insisted even more stubbornly on the correctness of his policies as a result -- such as during a recent speech to German stock traders just outside of Frankfurt. What haven't his German critics tried in their efforts to shed doubt on the measures he has taken, Draghi complained. They have warned of mega-inflation and of a red ECB balance sheet, the ECB head continued, but none of it has come to pass. "Repeatedly, those who have called our decisions into question, have been proven wrong," Draghi said. It was the Mario Draghi that many of his German listeners were all too familiar with: the man who is never wrong.
The divide between Berlin and Frankfurt is intensifying the destructive forces that are already buffeting the European common currency zone -- forces that may soon prove uncontrollable. Germans are distancing themselves from Europe's central bank and Europe's central bank is distancing itself from the Germans. Is there a danger it could lead to an unwanted disintegration of the euro zone?
There are plenty of good reasons to search for a compromise, not just to prevent the worst, but also because each side has good arguments. On the one hand, it is correct that, just like interest rates, the inflation rate is also hovering around zero, which is why it is premature to speak of the expropriation of German savers. On the other hand, the ECB should take note of the analyses carried out by many experts which show that the effects of the central bank's measures are waning even as the risks are rising.
It is ironic that the Bundesbank, which is one of Draghi's fiercest critics on the ECB's Governing Council, now finds itself between the frontlines. The German central bank has long been dissatisfied with Draghi's monetary policy. But Bundesbank President Jens Weidmann and his staff find it exceedingly disconcerting that voices from Germany are now calling ECB independence into question.
At the end of a difficult week, there were at least initial indications that the adversaries are interested in rapprochement. The ECB hurriedly announced that the helicopter-money idea is not currently under consideration. And French ECB director Benoit Coeuré emphasized that the institution was willing to listen. The ECB, he said, "is always open to constructive dialogue with politicians and citizens." It is also prepared to address "concerns, insofar as the required independence from politics and lobby interests is maintained."
The question, though, is whether the head of the ECB sees things the same way.
By Martin Hesse, Ralf Neukirch, René Pfister, Christian Reiermann and Michael Sauga