After months of taking repeated drubbings by leading German politicians, European Central Bank President Mario Draghi decided to strike back. In a stinging and seldom seen rebuke, issued in response to charges that the ECB is hurting the German economy, the fiercely independent institution released a research paper documenting how it isn't the ECB's monetary policy that is hurting Germany, but rather the domestic policies of successive German governments.
Draghi has been excoriated relentlessly by German Finance Minister Wolfgang Schauble for allegedly depriving German savers and pensioners of money by way of the ECB's expansive monetary policies, which have depressed interest rates. Schauble went so far as to say that Draghi's decisions to pump billions of euros into the European money market were pushing voters to populist parties.
On May 30 Schauble reiterated his warnings about the ECB. The rebuke came just one year ahead of general elections in Germany.
The ECB's research paper opines that Berlin's investment policy (or the lack thereof) is at fault. The Bank reasons that a dearth of public investment into the country's infrastructure, research and development, and German consumer spending in general is holding back the German economy.
In short: Because the ECB is keeping interest rates low, it is much easier for the German government to take on cheap loans -- something which it can easily do, since it has a budget surplus and national debt is declining fast -- and invest, thereby boosting the domestic economy.
Ramifications for all of Europe
The outcome of the debate between the ECB and Berlin is all the more important because Germany has a current account surplus thanks to its strong exports. As one economic truism goes: One man's gain is another man's loss.
Yet a country's economy cannot live on exports alone; it also needs to enthrall consumers into buying more German products, which will also aid supplier countries to Germany. If German consumers buy more products, so the ECB argues, the economies of European countries where those products are partly produced or assembled will benefit, thus lifting the entire European economy.
The ECB's reasoning in this case fits right in with what many economists have been saying for years: that the German consumer needs to boost all of Europe by buying European. So far the German government has resisted pressure to dig into its pockets and boost domestic spending.
Yet on the other hand there is a case for Berlin's point of view. Germany's leaders realize that further down the line, the country is facing enormous problems.
Germany is a demographic time bomb. Germans will be leaving the labor force in droves in the coming years, straining the German collective welfare state. There are simply too many people reaching retirement age and too few young people picking up the tab, especially to finance the country's cherished health care system. This while the German pensions system isn't sufficient for Germans to keep up retirement incomes equal to their expenditures.
So Germans like to save for their retirement. Low interest rates on their savings are making a lot of elderly Germans understandably nervous as their retirement looms closer.
This economic reality helped push Angela Merkel's open-door policy for refugees. She aims to quickly integrate approximately 1 million refugees into the German labor force. This new blood will hopefully help to pay the bills.
The war of words between the ECB and Berlin shouldn't need to be a matter of either-or. While the ECB agrees that in the short term, interest rates are depressed by the Central Bank's expansive monetary policy, in the long run, smart public spending by the German government, such as in its truly ailing infrastructure, should lift all boats -- in Germany and Europe. People in other European countries will have more money in their pockets with which to buy German products in the years to come.
It's just that it is a tough message to sell for Angela Merkel's CDU party with a new populist, pro-savers party in the shape of the popular Alternative fur Deutschland breathing down her neck in the upcoming election campaign. Expect more artillery barrages between Berlin and the ECB until the voting booths close.