German pride shifting to frustration in role as euro area’s growth driver

Frankfurt: Germany is cursed by its own economic strength.
For eight years, the nation of 83 million people has been the euro area’s growth driver. Now it’s at the forefront of the currency bloc’s reflation, with price increases potentially exceeding 2 per cent, and dissatisfaction with the European Central Bank (ECB) has morphed into outrage.
Critics and media are slamming the institution’s monetary stance — set to support not just Germany but the entire 19-nation region — as mainstream parties struggle to contain a surge in populism ahead of national elections. Finance Minister Wolfgang Schaeuble has warned that higher inflation could cause "political problems,” and German monetary officials are urging their peers to start devising an exit strategy from unconventional stimulus.
"ECB-bashing in Germany will certainly speed up on Monday,” said Carsten Brzeski, an economist at ING-DiBa in Frankfurt. "It’s a completely overblown discussion — as long as you have core inflation of around 1 per cent in Germany, there really isn’t any reason to worry.”
German inflation saw the largest jump on record when it accelerated to 1.7 per cent in December, as euro-area price growth almost doubled to 1.1 per cent.
Another strong reading — economists predict 2 per cent — would fan a debate questioning the ECB’s policy stance that was fired up after the country’s most-read newspaper Bild responded to last month’s increase with a call to "Raise rates now!”
German angst
Prominent German economists and politicians are blunt in their warnings that monetary stimulus is going too far, even with inflation primarily driven by energy costs that the ECB can’t control. Germany’s central bankers are nudging their colleagues toward a discussion about how to normalise policy in more subtle tones.
ECB Executive Board member Sabine Lautenschlaeger argued that "all preconditions for a stable rise in inflation exist” and the question of an exit can "soon” be addressed. Bundesbank President Jens Weidmann repeatedly warns of risks related to asset purchases and an overly accommodative stance.
Even though Germany’s aversion to inflation — rooted in the 1920s, when workers used wheelbarrows to collect their daily pay — is met with sympathy abroad, the intensity of the discussion has some people spooked.
Spanish Prime Minister Mariano Rajoy expressed concern last week over a premature tightening, given that his nation still has about a fifth of its workforce standing idle.
A slew of data this week will provide an update on growth, inflation and confidence in the euro-area economy.
"You have periphery states with very low inflation because capacity isn’t fully utilized there, and Germany, where a higher capacity utilisation results in a stronger upward trend of prices,” said Stefan Kipar, an economist at Bayerische Landesbank in Munich.
"It’s a mathematical equation — even when the ECB reaches its goal of inflation just below 2 per cent on average, some countries will have lower rates while others will overshoot,” he added.
ECB President Mario Draghi has tried to assuage German concerns, arguing the continued support of the euro-area economy with low interest rates and asset purchases is in the country’s interest, and inflation is far from spiraling out of control.
His argument is that underlying price pressures are still weak. German companies are only partially passing on higher costs to clients, and consumers haven’t noticed a significant pickup in inflation. Wage growth has remained subdued despite above-potential growth over the past three years and a decline in unemployment to a record low.
"Wages in Germany have been growing moderately in past years, but that hasn’t led to any significant upward pressure on German core inflation, and I don’t really see that changing this year,” said Andreas Rees, an economist at UniCredit Bank in Frankfurt. "I don’t really see any big inflation risks.”