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Analysis
German duo show tactical voting

German duo show tactical voting

Political jostling ahead of September elections
Waiting to see if rate cut does any good

by David Marsh

Tue 7 May 2013

Last week’s European Central Bank rate cut was accompanied by some intriguing tactical voting by the German members of the 23-man ECB Council. Executive board member Jörg Asmussen voted against the 0.25 percentage point cut to 0.5% in the ECB’s benchmark interest rate, while Bundesbank president Jens Weidmann voted in favour – all part of the political jostling in Berlin and Frankfurt four-and-a-half months before the German elections on 22 September.

The German duo has opened a new front in the perennial complexity between Germany and the ECB. Asmussen has burnished his domestic German credentials as a hawk often to be found in sheep’s clothing. Weidmann preferred not to vote against the rate cut, showing some solidarity with ECB council colleagues, and saving ammunition for more important battles.

The reasons Asmussen put forward for opposing the credit easing – that it might cause damage in Germany by making fixed income savings products so unattractive as to promote a flight of capital into risky assets – raised eyebrows. The ECB is supposed to make its decisions based on conditions for the euro area as a whole, rather than specific countries.
 
Asmussen is less worried about the immediate impact on inflation, which at 1.5% in Germany is not much more than the overall ECB average of 1.2%. He is more concerned about the risk of over-pricing of assets such as property or even German equities, where the DAX index closed at a record high on Friday after dealers took heart that even the ECB was joining in the across-the-globe trend towards easy money.

On several grounds, the ECB action was heavily overdue, now that euro area GDP has fallen for five successive quarters. However, a number of factors, ranging from uncertainties over Italy’s new government through to the general move in Europe’s political capitals (including Berlin) to acquiesce in relaxing overall euro austerity measures, made it necessary for the ECB to delay its hand until pressure for a rate cut became unstoppable.

Asmussen replaced Jürgen Stark, generally seen as highly dogmatic, who announced his resignation from the ECB’s Executive Board in September 2011. The main reason for Stark’s departure was his opposition to the Bank’s policy of purchases of peripheral countries’ bonds, but another good reason was that he had simply shown himself incapable of influencing either the six-man board or the 23-strong council.

Both Asmussen and Weidmann show a cool head and a willingness to try to influence matters over the longer-term. Facing diminished prospects for an economic recovery in the recession-bound bloc, Mario Draghi, ECB president, said last Thursday that the Bank remained ‘ready to act if needed’ with further interest rate cuts.

If there is a further build-up of pressure towards still-easier money, then Weidmann and Asmussen may to have to rethink their softly-softly tactics. For the time being they are likely to lie low and, like everyone else, watch whether the ECB’s latest efforts do any good.

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