ECB's Precarious Mission: Please Both North and South

By Todd Buell Features Dow Jones Newswires

The European Central Bank's approach to winding down its monetary stimulus risks causing frustration in both northern and southern European countries -- but for opposite reasons.

Continue Reading Below

Countries in the euro currency area's north worry that, even if the ECB gradually slows down its EUR60 billion ($71 billion)-per-month bond purchases, interest rates will still stay close to zero, making it hard to earn money from savings. They prefer higher interest rates. People in Europe's south, however, fear that the looming end of stimulus programs could push up the euro, eat into export earnings, and force governments to raise taxes.

The clashing concerns show the difficult balancing act the ECB must perform in setting a single monetary policy for 19 diverse economies. The bank meets on Thursday.

Trust in the ECB as an institution has fallen significantly since the crisis in both the north and south. A European Commission survey found that the percentage of those in Germany saying they "tend to trust" the ECB fell from 65% in 2007 to 36% in May of this year. In Italy the trust gap has fallen from 52% to 34%. But the reasons for the mistrust differ.

"As long as interest rates stay extremely low... people will continue to criticize the ECB" in Germany, said Jörg Krämer, the chief economist at Commerzbank in Frankfurt.

The German business press frequently attacks the ECB. Gabor Steingart, the publisher of Germany's major business publication Handelsblatt, lashed out at the ECB after its September meeting. He tweeted that the central bank's 0% benchmark rate was the "largest expropriation program in Germany" since Communist East Germany.

Continue Reading Below

Disdain for ECB policy unites an otherwise fragmented banking sector.

At a conference in September in Frankfurt, John Cryan, the CEO of Deutsche Bank, the country's largest lender, urged a change in policy from the ECB. "The era of cheap money in Europe should come to an end, despite the strong euro," he said.

He was particularly specific in his criticism about the ECB's policy of charging banks to park cash at the central bank overnight. "It would help us greatly if Europe were to bring negative rates to an end."

Since June 2014 the ECB has put its deposit rate in negative territory, effectively charging banks to park money with the central bank overnight. The ECB hopes this will encourage banks to lend funds rather than hold onto them. Banks complain that this policy eats into their profits.

Many everyday citizens in Germany would like to see a policy turn. Quantitative easing "was indeed necessary," said Markus Thorwartl, a 45 year-old Austrian computer technician, while standing at Frankfurt's train station. "But it can be reduced."

"Quite a number of people feel that savings for old age are eroding and that may explain why they don't take kindly to what the ECB is doing," said Thorsten Polleit, the chief economist of the precious metals firm Degussa.

The attitude in Germany's neighbor the Netherlands is similar. This spring ECB President Mario Draghi faced two hours of tough questioning from members of the Dutch parliament.

"You may be a hero in Italy. You may be a hero in southern debt countries, and in the world of investors like Goldman Sachs and the banks, but here in Holland you're not a hero," snapped Tony van Dijck, a member of the far-right PVV party, complaining that ECB policies denied Dutch citizens earnings on pensions.

Southern Europe sees it differently.

There Mario Draghi is hailed as the man who saved the euro with his pledge in July 2012 to do "whatever it takes" to save the single currency. At the time there was serious risk that high borrowing costs would force weaker eurozone states to exit the currency bloc.

Since Mr. Draghi's immortalized three-word phrase, the yield on Italy's 10-year bond has dropped from about 7% to about 2%.

But now businesses worry that a stronger euro, which could follow tighter monetary policy, could eat into earnings. A strong currency raises the price of exported goods in foreign currency. A rising euro would make it "tougher for us to sell" in the important U.S. market, said Riccardo Pasqua, a wine producer from Verona.

Fellow wine maker Matteo Lunelli, chairman of Ferrari Wines, said this year's wine harvest was weak in France and Italy, producing low volumes. "Prices will rise anyway. So it would be important not to have on top of that a stronger exchange rate," he said.

With the end of QE, the Italian state's borrowing costs could rise, meaning that the government might have to raise taxes to keep the budget deficit within the eurozone's rules.

"You need to find money to pay for the debt, and the only way that a government can do that without leaving the eurozone or violating fiscal rules is to [go] into the pockets of people," warned Marco Valli, a member of the European Parliament from the anti-establishment 5-Star Movement. "People will get angry."

Italy is due to hold elections early next year and Mr. Valli's party is now polling about even with the ruling Democratic Party.

In Spain, monetary policy has been "very helpful to get the country through the crisis," said David Vegara, an economics professor at the ESADE Business School in Madrid. He said Spaniards respect the ECB today but that "can change" when interest rates start to rise. Spain's economy is growing at a robust clip, but still has an unemployment rate of around 17%, nearly twice the eurozone average.

"Clearly, there is a chance that the economy accelerates and rates go up and some people start feeling the pain" through higher mortgage payments, said Abel Enguita Ferre, a Spain-based economist for bank UniCredit. "But hopefully the ECB will do it gradually," he said.

Write to Todd Buell at todd.buell@wsj.com

(END) Dow Jones Newswires

October 26, 2017 03:44 ET (07:44 GMT)