ECB’s Draghi Faces German Bundestag

After criticism from some German politicians, the head of the European Central Bank traveled to Berlin, Oct. 24, to meet German lawmakers. During the session, he confirmed that recent monetary measures are not inflationary.

Back in August, the general secretary of one of the ruling coalition parties had called Draghi a “counterfeiter.” Alexander Dobrindt, who heads the conservative junior party CSU in the ruling coalition, had used this term as Draghi was pushing for more monetary easing. The German public and politicians have been concerned that expansionary monetary policy to support southern Europe will cause inflation in Germany.

Dobrindt was absent from the meeting yesterday and in general the tone was much more polite. Draghi’s two-hour meeting with German lawmakers was “convincing” said Norbert Barthle, a budget politician of the conservative CDU party. The CDU is the Christian democratic party and the senior conservative party in the ruling coalition. Barthle even went as far as saying that Draghi “appeared like a Prussian southern European,” according to Der Spiegel magazine.

Unconventional Measures Noninflationary

“We don’t see any signs that inflation expectations are becoming unanchored, because of the announcement of the program [to buy short-term government bonds],” Draghi told the German press agency DPA.

The ECB in September announced that it would buy an unlimited amount of short-term debt of a troubled nation should a country formally request a bailout by the European Union. Draghi previously stated that the buying of short-term bonds by the ECB would not be inflationary, as those bonds would quickly be paid back.

The country would also have to accept austerity conditions that come with the bailout and the help from the central bank. In turn, it would benefit from a reduction in interest rates and better access to credit markets.

In the German parliament, Der Bundestag, Draghi affirmed that the launch of the program was necessary to avoid “disaster scenarios.” The program so far has not been enacted, however, as no country has formally requested a bailout under the new terms. The market expects Spain to be the first to activate it, as regional elections end in the second half of November.

Not all German politicians were convinced, however. Frank Schäffler of the liberal Free Democratic Party (FDP) said that banks and countries should be allowed to default; otherwise nothing will change, according to Der Spiegel. “In three months, we will see another payment [for Greece] and nothing happens,” says Schäffler, whose party also forms part of the governing coalition.

Expert Skeptical That Program Will Work Long Term

In an interview with The Epoch Times, Dan Oliver, principal at the investment fund Myrmikan Capital expressed his concern about the program. “There is no practical difference lending to an insolvent borrower short term or long term, the reality is whenever you ask for your money back, you don’t get it.”

The expert in monetary economics does not believe that austerity programs will increase solvency. “Draghi is going to allow European countries to spend money that they don’t have and the only hitch is that the ECB can demand money back [within three years]. If they ever did that, the country will just default.”

Oliver believes, however, that the ECB’s initiative might be successful short term, but won’t solve problems on a structural basis. “This is an old story both in theory and in history that printing money is good for the short term and bad in the long term. This should not be news to central bankers. Now we are going to print more money, of course it’s going to help in the short term. But is it solving the imbalances in the Eurosystem and is it addressing the fundamental debt problem?”

With respect to the costs Germany might face, Dan Oliver has sobering message for the country: “Germany will pay to the extent it stays in the eurozone. The longer it stays in the eurozone, the more it will be forced to do things it doesn’t want to do. … By definition, the longer Germany stays in the eurozone, the more inflation Germany is going to put up with.”

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