It was not meant to happen. Friedrich Merz, the German CDU party’s candidate who would like to be Finance Minister in the next coalition government, launched an attack on the European Central Bank (ECB) for being too soft on inflation. Worse still for all those advocates of Central Bank independence, Jens Weidmann, the Head of Germany’s Central Bank and an ECB Governing Board member has also spoken out in public about the way German inflation is rising. He has reminded his ECB colleagues of the prime importance of controlling inflation. German economic establishment opinion thinks the ECB is printing too much and buying too many EU bonds to keep rates artificially low.
The pressures generated by the German election are intensifying this wave of disapproval of ECB actions and inactions. This week something changed in German public opinion as the September 26 federal election approaches.
The SPD, which had been trailing the CDU and the Greens in the past, moved into the lead in the latest polls. The CDU sunk into a poor second place, with one measurement suggesting its support has fallen below 20%. The immediate cause was the first of three TV debates between the three people most likely to become Chancellor.
In that debate, Olaf Scholz, the leader of the SPD used his current position as Vice Chancellor and Finance Minister in the coalition government to wrap himself in the reassuring stance of Angela Merkel, his current CDU boss. He became the continuity candidate. Annalena Baerbock, the Green candidate, was thought in polls to be more successful and likeable than Armin Laschet, Mrs Merkel’s replacement as Leader of the CDU.
Influencing the ECB
The CDU/CSU, so used to leading German coalition governments, has now decided on a more aggressive strategy to try to win back lost support. The German inflation rate in August hit a new high of 3.9% on the CPI measure and is widely expected to rise to 5% later this year. This is shocking to many in Germany, who have a deeply embedded fear of inflation from folk memoires of the Weimar hyperinflation of 1923. The CDU is now campaigning against the dangers they see in an SPD/Green led coalition that they think will stoke inflationary fires more with too much domestic spending and borrowing.
Armin Laschet praises Friedrich Merz as his economic expert, accepting his vocal criticisms of the way the Euro is run. The German CDU, which is used to seeking influence over the ECB in unseen ways through government, has to become the outsider voicing public complaints about a policy they think is too inflationary and hazardous.
It has an ally in Jens Weidmann, whose position as Head of the Bundesbank gives credibility to their views. He warned that the ECB could not keep rates down to help governments finance excess spending if inflation become a problem. The CDU like those sentiments when budget deficits and spending levels are an important part of the political debate.
So, the German national election starts to impinge on the policy of the Central Bank of the Euro area. Maybe the Eurozone would be relieved privately if the CDU lose the Chancellorship and if the balance of party success in Germany swings more in favour of parties that support loose money and larger deficits.
An end to support
The ECB is in no rush to tell markets it is ending its Quantitative Easing programme at the end of March 2022, as intended, given the worries it may also have about the French Presidential election in the second quarter of 2022, and their wish to see the Mario Draghi programme of stimulus for the Italian economy succeed, based as it is on EU money supported by ECB generosity.
The German hawks want the ECB to reduce its current monthly purchases of bonds and announce that all bond buying will end next March. They may want even more, as Germany heads towards 5% inflation. What is acceptable to an American audience wanting to run hot is not stability to a German audience fearing inflation.
Whether any of this is enough to pull voters back to the CDU is another matter. Armin Laschet has struggled to win acceptance ever since he laughed and joked against the backdrop of The President of Germany’s remarks on the deaths and destruction in the floods. The polls still confirm a lack of enthusiasm for any party or any coalition of three parties.
It looks as if the eventual result of coalition negotiations will be a pro-green and pro-EU policy with a weakened German input to what the EU does. This may well include less influence over the ECB, which currently must be finding German criticism unhelpful. The ECB did reveal a minority in their July meeting worried that inflation was a problem they needed to tackle. The ECB itself has to show it can master inflation and allow a decent recovery – a task which is getting more and more difficult.
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