AfD surge brings fresh ECB hurdles

Complaints about Lagarde politicisation

The surge of the anti-euro, anti-immigrant right wing Alternative for Germany (AfD) in east German politics poses further complications for the European Central Bank’s plans for further monetary easing this autumn.

In Sunday’s elections in Saxony and Brandenburg, the two most populous east German states outside Berlin, doing relatively well economically but affected by general regional decline, the AfD gained significantly against traditional parties, scoring a strong second in both areas.

Chancellor Angela Merkel’s Christian Democratic Union retained control of Saxony with 32.1% of the vote, ahead of the AfD’s 27.5%. In Brandenburg the Social Democratic Party, junior partner in Merkel’s Berlin grand coalition, remained the strongest party, with 26.2% against the AfD’s 23.5%. In both states the leading parties suffered heavy losses compared with the last poll five years ago. Raising fresh doubts on the stability of the Berlin coalition, the parties will need the support of the Greens to form viable coalitions.

The breakthrough enshrines the radical AfD, formed in 2013, as the most potent opposition force in the eastern part of Germany since the region was liberated from Soviet hegemony in 1990.

General disquiet over development of reunification over the last 30 years, the rise in immigration since 2015, and anxiety over monetary and economic affairs have fuelled the AfD’s rise. ‘There has been general disenchantment in the east on how the population has been treated,’ says one Berlin government official who knows the localities well. ‘There is a feeling that the region is run by other people who tell the east Germans how to behave, and on top of this put negative interest rates on bank deposits.’

Wolfgang Schäuble, the former German finance minister, in April 2016 apportioned half the blame for the AfD’s rise to the ECB’s quantitative easing purchases of government bonds under President Mario Draghi. One of the reasons why many east Germans believe they have become second-class citizens reflects a QE-induced rise in housing prices and rents.

With lower income and savings than west Germans, their compatriots east of the river Elbe face a double handicap: inability to profit from self-enriching finance-fuelled property investment together with exposure to much increased rents. This has been one of the background factors behind a controversial move towards much tighter control of rents in Berlin in recent weeks.

Draghi, in his last two months in office, has inflamed German conservatives by appearing to set the ECB on the path towards further negative interest rates and more QE, apparently setting a predetermined path for Christine Lagarde, his successor. The International Monetary Fund managing director, who takes over on 1 November, in the last few days has said she favours further monetary easing. One big factor tying Lagarde’s hands is weakness in Italy. Failure to meet market expectations about fresh ECB bond purchases would cause an immediate sell-off in government bonds for which the ECB would be blamed.

Many German conservatives believes Lagarde represents a further unwelcome politicisation of the central bank. She attracted fresh criticism at the weekend by delivering a fulsome laudatio for Merkel at an honorary degree ceremony in Leipzig, seen by some as establishing unhealthy closeness between the president-designate of the statutorily independent ECB and the leader of the euro area’s biggest economy.

Past opposition to QE by Jens Weidmann, the Bundesbank president, was a principal factor behind his failure earlier this summer to secure nomination to take over from Draghi. There are doubts whether Weidmann will stay for the entirety of his second eight-year term at the Bundesbank that started in May. In the meantime he looks likely to continue to fight against QE when the debate restarts this autumn – and will be joined by other conservatives on the ECB council.

The last few weeks have seen further German criticism of QE and zero or negative interest rates, not simply on economic grounds but also because of wider effects on social cohesion and political stability. Paul Kirchhof, a high-profile former judge at the German constitutional court, has stated that zero interest rates, by restricting savers’ ability to manage their assets, damage German constitutional commitments to property rights. His intervention is important because the constitutional court is still embroiled in lawsuits on the legality of the ECB’s previous QE action.

Christian Thimann, a former senior aide to ECB Presidents Jean-Claude Trichet and Draghi, now a leading figure in the German insurance industry, has criticised disruption to the Europe social market economy through negative interest rates and QE-fuelled capital market distortions. He points out that, in addition to €2.4tn in already-purchased government bonds, the ECB and national central banks are still buying €1bn per day to maintain net holdings in the face of annual redemptions.

Even officials at the IMF who were previously urging the ECB to carry out QE are highlighting resulting distortions to the market economy and losses at banks and insurance companies which will eventually damage savers and customers. ‘We never thought it would go on for so long,’ says one.

David Marsh is Chairman of OMFIF.

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