European Stimulus Less Likely as Bundesbank Shuns ECB Monetary Policy


Germany’s Bundesbank has again publicly resisted the European Central Bank’s call to expand its monetary stimulus program, as the German bank president dismisses monetary moves as ineffective.

“Calls for a public fiscal stimulus plan in Germany to boost the Eurozone economy are amiss,” Bundesbank president Jens Weidmann said in an economic summit in Germany.

The president dismissed monetary policy as an effective tool to stimulate growth, emphasizing the need for austerity instead. “Investment rates that are above the growth potential of a developed economy aren't likely to boost prosperity—this applies to both public and private investments,” he said.

Weidmann added that calls for Keynesian stimulus through an expansive monetary policy are akin to rubbing “an Aladdin’s lamp” and wishing the Eurozone’s troubles away. His negative comments on quantitative easing are in sharp opposition to ECB President Mario Draghi’s public moves to establish and increase a bond-buying program that would increase the ECB’s balance sheet and, at least in theory, expand bank lending to small businesses within the region.

“Innovative Companies and Competitive Products”

Despite Germany’s insistence that it should not increase spending, the International Monetary Fund as well as Eurozone countries that have tipped towards recession, notably France and Italy, have urged the country to increase public investment in an attempt to increase aggregate demand that could in turn boost employment and demand in the Eurozone.

Despite years of austerity, high unemployment has remained in many pockets of the Eurozone, while growth in Germany has decelerated. Germany’s recent promise to spend 10 billion euros on public investments over three years from 2016 onwards met criticism, as many economists say this is not enough to boost demand.

Weidmann has dismissed such criticisms, insisting that European countries need to improve their productivity to compete in global markets. “It is an illusion to believe that monetary policy means can raise economies' growth potential permanently, or create lasting jobs. In the end, this can only be achieved by structural reforms, because growth and employment occur in innovative companies and competitive products, and well-educated and highly motivated employees."

Cheap Oil and Deflation Risks

Declining commodity prices have weakened the argument for hawkish monetary policy, and the European Central Bank has recently got more aggressive about making the case for a Federal Reserve-style round of quantitative easing. ECB President Mario Draghi is rumored to discuss the impact of oil prices on the Eurozone economy, particularly on inflation expectations and bond yields. 

Inflation in the Eurozone has fallen from 0.4% in October to 0.3% in November, a five-year low. Many analysts have expected the Eurozone to fall into deflation by 2015, and bond yields have fallen steeply throughout the European Union because of that expectation.

Meanwhile, oil’s price slide has accelerated after OPEC’s decision not to reduce oil output. WTI oil futures dipped below $65 per barrel for contracts expiring in January, but have since recovered to below $66. That is still 36% lower than the 52-week high, and a 27% year-over-year decline.

Future falls in oil prices could cause aggregate prices in the Eurozone to fall into negative territory on a tight money supply, as European consumers have remained slow to increase their spending and governments continue to refrain from investing in public projects.