Germany launches strategy to counter ECB largesse

The plans have major implications for monetary union, dashing hopes in Southern Europe that Germany might accept a few years of mini-boom at home to help lift the whole system off the reefs. Andreas Dombret, a key board member of the Bundesbank, said the body would be given powers to check “excessive credit growth” and impose “maximum leverage ratios” to nip economic overheating in the bud. The Bundesbank will be able to impose “counter-cyclical capital buffers” on lenders, and use “macro-prudential haircuts” in the securities markets. It is understood that the menu of new tools will include limits on the loan-to-value on mortgages along the lines of those used in Hong Kong and other Asian states. The new framework - introduced by German government in a draft law this week - is partly inspired by the Bank of England’s new system but it also has a German twist. The authorities in Berlin and Frankfurt are worried that the ECB’s 1pc interest rates are too low for conditions in Germany, where unemployment has fallen to its lowest in 20 years. The ECB’s €1 trillion (£834bn) blitz of three-year loans to banks has started to reignite monetary growth in Germany, even though the key aggregates are still collapsing in southern Europe. German house prices rose 5.6pc last year after a decade of stagnation. Officials in Frankfurt are watching the property data closely, fearing that Germany may succumb to the sort of housing bubble that engulfed the Club Med bloc in the early years of EMU. “The Bundesbank does not want to be blamed for making the same mistakes as central banks in Ireland and Spain where they did not address asset bubbles early enough,” said Bernhard Speyer from Deutsche Bank. The German authorities are in effect preparing a form of quasi-monetary tightening to offset ECB largesse. The move could prove controversial. Nobel Paul Krugman and other Keynesians around the world argue that burst of high growth and inflation in Germany is exactly what is needed to help cushion the pain in the Latin bloc. “If the eurozone is to adjust, southern countries must be able to run trade surpluses, and that means somebody else must run deficits,” said Dr Speyer. “One way to do that is to allow higher inflation in Germany but I don’t see any willingness in the German goverment to tolerate that, or to accept a current account deficit. “This is a fundamental gap in German economic strategy. They are hoping that the US or emerging markets will somehow pop up to do the job for them. “However, fiscal policy is too loose at the moment given the boom, so you could say that this is Germany’s contribution to saving the peripheral eurozone." Germans implemented deep reforms and endured years of pay restraint in the early years of the last decade. There is a widespread view from top to bottom in German society that Euroland’s struggling debtor states can claw their way back to viability by sticking to austerity. This “Calvinist” approach overlooks the fact that Germany achieved its feat in the middle of a global capital goods boom, and always had lower borrowing costs than EMU peers. It also did so at a time when the Club Med bloc was allowing its domestic inflation to creep up. It may be impossible for these countries to replicate this if Germany now takes pre-emptive steps to choke off its own expansion so soon.