German headache for Draghi as ECB meets

An unusually public spat between European Central Bank chief Mario Draghi and German Finance Minister Wolfgang Schaeuble looks set to hang heavy over a key meeting of ECB policy makers Thursday.

Six weeks after the ECB announced a new raft of measures aimed at pushing chronically weak inflation in the euro area back up to economically healthier levels, Draghi faces increasingly hostile criticism in Europe's biggest economy over the possible need for still further action.

"Germany is the ECB's main problem at the moment," a source close to the central bank told AFP.

Last month the ECB cut interest rates, beefed up its controversial asset purchase programme known as quantitative easing and made vast amounts of cheap loans available to banks.

But analysts seemed sceptical about the central bank introducing further measures at Thursday's policy-setting governing council meeting.

"Any new measures would be more surprising than Albania winning this year's European soccer championship," joked ING DiBa economist Carsten Brzeski.

Instead, attention at Draghi's traditional post-meeting news conference will likely focus on the ECB's war of words with Germany, the expert said.

Schaeuble has been unusually frank about his growing unease with the ECB's polices, suggesting they were helping foment political unrest in Germany and aiding the rise of an anti-euro, anti-immigrant party, the AfD.

- 'ECB bashing' -
German criticism of the ECB -- in this case over the consequences of low interest rates for savers and for banks -- is extremely rare and has clearly rankled the Frankfurt-based bank.

Schaeuble and Draghi apparently cleared the air on the sidelines of last week's meeting of the International Monetary Fund in Washington.

Nevertheless, "no matter how much public backtracking there will be, the genie is out of the bottle and Schaeuble has 'legalised' ECB bashing in Germany," Brzeski said.

"The war of words will not be over."

In the past, the ECB has always reacted archly to any perceived attempts by politicians to meddle in its decision-making processes.

But when tackling Schaeuble's criticism, Draghi will also have to bear in mind that he still needs to make additional action further down the line -- which for most ECB watchers is more or less inevitable -- palatable, experts said.

"We expect a strong, open-hearted defence of ECB policies" and on central bank independence, said UniCredit analyst Marco Valli.

Even Germany's Bundesbank chief Jens Weidmann, who has often been at loggerheads himself with Draghi over the ECB's response to the threat of deflation, felt moved to rebuke Schaeuble's attempted interference.

"An expansionary monetary policy stance is appropriate at this juncture regardless of different views about specific measures," Weidmann said.

According to the latest official data, eurozone inflation stood at zero percent in March, a long way off the 2.0 percent seen by the ECB as compatible with healthy economic growth.

Commerzbank economist Michael Schubert said an initial assessment of the measures announced by the ECB in March was "rather sobering".

- More action needed -

The confidence boost that the central bank had hoped for has not materialised, said the banker.

Hence, "the longer the disappointing reaction lasts, the more likely it is that the central bank will take further steps," Schubert said.

"It will probably opt for the same instruments it has used so far and this will hardly increase confidence significantly."

UniCredit's Valli said that "for the time being, the ECB's focus remains squarely on implementing the several measures already announced".

Important details are still lacking, for example, about the corporate asset purchase programme which the ECB unveiled last month.

"Draghi will focus this week on talking up the significance of the recent policy changes," agreed Ben May at Oxford Economics.

"At the same time, though, he will warn that the ECB stands ready to reopen its toolbox if the economy is hit by further adverse shocks," he said.

The rise in the euro also poses a problem for the ECB as it puts the squeeze on eurozone exports and can harm economic recovery.

Natixis economist Johannes Gareis said that "we expect Draghi to address the recent strength in the euro exchange rate".

"Furthermore, more details about future corporate bonds purchases and (cheap loan scheme) TLTROs could be in focus in this week's meeting."