It prevents monetary and fiscal policy from effectively playing their respective roles, resulting in difficult but necessary actions being delayed. The result is that it takes a real crisis to bridge differences and align the stars toward an appropriate response.
A Reuters story reveals just how severely the relationship between Germany and the ECB has deteriorated, especially since Draghi’s surprise speech at Jackson Hole in August. Merkel felt betrayed, according to a German official, by Draghi’s call for fiscal policy to play a greater role. The story says Merkel will refrain from questioning ECB policies in public. But judging by recent comments from Schaeuble and Weidmann, it seems this does not extend to other German officials.
What is really revealing is that not only are the ties between Draghi and German politicians poor, but that the relationship between Draghi and Weidmann has also soured significantly. “Weidmann avoids Draghi like the plague,” the story quotes an ECB official as saying. Under the Trichet ECB there were two German resignations in the form of Weber and Stark, although Reuters says there are no signs that Weidmann might be considering a similar step.
Draghi lacks a German ally to explain the ECB’s thinking since the departure of board member Joerg Asmussen and Draghi’s top adviser Christian Thimann last year. Attempts to rely on Benoit Coeure, a Frenchman, have not met much success. What is also revealing from the story is Draghi’s leadership style relying on a small group led by Coeure and Praet as opposed to relying on a broad range of views.
Behind the fractured relationships lies a difference in ideology about the causes of the crisis and thus the cure. Germany continues to think the crisis is structural and therefore requires eurozone countries to put their fiscal houses in order. Draghi/ECB, meanwhile, think there is a deficiency in aggregate demand that needs loose fiscal/monetary policy. These are differences that cannot be resolved overnight, suggesting things will have to get worse before they get better.
Historically, having the right actors in place and being willing to cooperate have been key to resolving crises. We saw this with the US savings & loans crisis, where it took a combination of Bush/Seidmann/Greenspan, and during Japan’s financial crisis when it took Koizumi/Takenaka/Fukui to deliver a satisfactory resolution.
With Draghi not having a supporting cast, we could see the eurozone remain at risk of a weak growth and inflation outlook.