A few surprises as the new German cabinet takes form

Over the weekend, following the 'yes' vote among the SPD membership, the composition of the new German cabinet was announced – almost 3 months after the election.

Despite, the outcome being broadly known there were a couple of surprises. Below we analyse the key points and personalities.

Jörg Asmussen (left) leaves the ECB board to join the Labour Ministry
This is probably the biggest surprise and could have some knock-on effects. Asmussen has stressed that he has stepped down from the ECB Executive Board to become Deputy Labour Minister (definitely a step down) for purely personal reasons. However, speculation will certainly arise over whether playing the bridge between the ECB and the Bundesbank had taken its toll on him.

The immediate front runner for the post is Sabine Lautenschläger (right), vice-president of the Bundesbank, although her nomination is not guaranteed since it has to be approved by all ECB members and get a (non-binding) endorsement from the European Parliament. If she does take up the post it could create headaches for ECB President Mario Draghi with the Bundesbank well known for its hawkish approach and its (sometimes open) disdain for the current loose ECB monetary policy. It could also be the case that the CDU/CSU only consented to the SPD's Andrea Nahles - who had adopted an aggressively leftist position on the eurozone and German economy during the campaign - becoming the Social and Employment Minister on the condition that Asmussen would be there to push continued structural reforms.

First female defence minister – a successor emerging?
Another surprise was the appointment of Ursula von der Leyen as Defence Minister - the first time the post has been held by a woman. This remains a high profile and tricky position in Germany, with a significant international element. Von der Leyen has already been tipped as a potential successor to Merkel and this post could be the making, or breaking, of her. Either way, it shows Merkel accepts the need to cultivate potential successors, something she has previously avoided by side-lining the careers of those who have sought to take up the mantel. Von der Leyen is an outspoken supporter of European integration so it will be interesting to see if she pushes for more EU resource sharing and/or competence pooling in this area.

SPD Chairman grasps a double edged sword?
In addition to his role as Merkel's deputy, the SPD's Chairman Sigmar Gabriel will head up the newly created post of Economy and Energy Minister – hence his new “Superminister” moniker. This is clearly a high profile role, with Gabriel now in charge of the Energiewende – Germany’s shift away from nuclear and fossil fuels to renewable energy. It provides a great platform for him to launch a campaign for the Chancellery in 2017. That said, the move could also backfire. There are already rumblings in Germany about the cost of energy, a problem which will also increase with the shift to renewable energy. Furthermore, implementing the shift will present numerous problems and Gabriel could become the fall guy for any failures. As for the economy brief, the Finance Ministry has a strong hold over many economic matters and Gabriel could find his hands full with the energy brief.

Rebuilding the Franco-German axis?
As expected the SPD’s Frank-Walter Steinmeier returns as Foreign Minister, who we have noted before has a Francophile streak and has previously shown a willingness to disagree with Merkel. While his impact could be limited due to the Foreign Ministry being side-lined on EU and eurozone issues – now the domain of Merkel and Schäuble – Steinmeier could still work to rebuild the partnership with French President Francois Hollande.

Other notable points include the appointment of Peter Altmaier to head the Chancellery (i.e. become Chief of Staff to Merkel). He has a keen interest and knowledge of the EU, but as previous head of the German arm of the European Federalists, he could provide a further challenge to UK Prime Minister David Cameron’s push for EU reform. The outspoken Hans-Peter Friedrich has been moved from the Interior Ministry to Agriculture, a less high profile post after he took significant flak for his handling of the NSA spying issue. Viewed from London this is a regret as Friedrich took a hard line on the need to reform EU free movement rules to prevent abuse by so-called 'welfare tourism'.

Overall, the CDU holds five ministries, the CSU three and the SPD six. Much has been made in the negotiations about Merkel giving up too much power, but we’d be careful of underestimating her. Given her strong position it’s unlikely she would have given up more than is necessary, and she has maintained hold over the key ministries and the key points of the agenda. There has been some tinkering on the edges of labour policies and spending priorities, but the approach of cutting the deficit and bringing down debt remains vital. Her procedural step by step approach also remains.

One thing that is clear is that the SPD is heavily invested and supportive of this coalition and there can be no chance of them shirking their responsibility. Whether this will prove positive for them at the next election remains to be seen.

A shift towards greater transparency at the ECB?

As we reported in today’s press summary, there has been an interesting development in the push for greater transparency at the ECB.

In a joint interview with Süddeutsche Zeitung and Le Figaro, Benoît Cœuré (BC) and Jörg Asmussen (JA), ECB Executive Board Members, both supported the longstanding call for the ECB to publish the minutes of the meetings of its Governing Council, saying:

BC: “Transparency is important for the effectiveness of monetary policy and for trust in the central bank. There was a time when the ECB was ahead of the curve in its communications and transparency as first central bank with regular press conferences by its president. Now the ECB is the only large central bank that does not publish its minutes of meetings. There is a demand in society for transparency and accountability. Therefore, I personally think that the ECB should start publishing its meeting minutes soon.”

JA: “The minutes should include who voted for what, and the reasoning behind that vote. Publishing the minutes will sharpen the European mandate, because the ECB will then have to explain why its decisions are in line with the European mandate.”

BC: “The other side of the coin is, as Jörg has said, that the Governing Council has a European mandate. The governors of the national central banks come here in a personal capacity – they do not represent their institutions or their countries – and should be accountable for what they do.”

This is something which many (including ourselves) have supported for some time (see here for a House of Lords report from 2003 which provides an interesting discussion of the issue), particularly during the crisis where the opacity of the ECB (on issues such as bond purchases, legal documents and potential policies) has at times caused confusion and uncertainty. It has also hampered the accountability of the ECB and its members despite the bank playing a central role in the crisis resolution.

But all that has been true for some time, so why might the ECB be changing its tune now? The most likely reason seems to be a switch in the communication policy of the ECB, which began last month with the change to ‘forward guidance’ (forecasting future interest rate policy). Although, this did little to change the substance of ECB policy (frankly everyone knew rates would be low for some time) it is a clear shift in tactics and rhetoric. Publishing minutes fits well with this new approach for a few reasons:

• It allows the ECB to provide further detail about its decisions and what the key motivating factors were.
• It highlights the discussions of various options which the ECB may be considering to combat the crisis, this could help telegraph future action and impact market sentiment without the need for an actual decision to be taken.
• It will demonstrate the weighting of support within the council for certain policy options, again providing further detail on likelihood of future actions but also the strength of feeling on various policies (i.e. a clearer picture of the dovish or hawkish nature of the council).
• Can be used to communicate concerns to the market and other policymakers which may not have warranted inclusion in the monthly press conference of the ECB President Mario Draghi. Furthermore, if published with a delay, can allow for reflection on the impact of different policies.
• Essentially, it provides a further tool in the arsenal of the ECB to help communicate with markets and achieve policy goals. As we have noted, the ECB has recently looked increasingly policy constrained and so any additional tool would likely be welcome.

All that said, the impact of this tool should not be overplayed. It is ultimately a small aspect of overall ECB policy, its main benefit is that it can provide further nuance to some of the blunter instruments (interest rates etc.). From an outside perspective it could provide a much needed insight into the decision making process – although this will ultimately depend on the credibility of the minutes (will they really reflect the true nature of the discussion) and when they are released.

On top of this, FAZ is reporting this afternoon that the ECB and national central banks will publish more details on the notoriously secretive Emergency Liquidity Assistance (ELA), although the article seems to suggest they may only release the framework or rules of ELA rather than details on its practical use and application. Still this would be a welcome, if small, step towards transparency.

Some steps towards greater transparency then, however, the underlying motivation seems more likely to be to give the ECB another tool in its new communication strategy rather than increasing accountability as an end in itself. Either way greater insight into the opaque institution playing a key role in the crisis should always be welcomed.

Deliberations begin as hearings draw to a close in Karlsruhe

The hearing at the German Constitutional Court into claims against the ECB's crisis policies is now over. Day one saw verbal jousting between the two men to the left (Bundesbank President Jens Weidmann and ECB Executive Board Member Jörg Asmussen) which we covered on our live blog. Day two of the hearing was a bit more cagey and less political but possibly more revealing in terms of the Court's thinking.

Constitutional Court Judge Peter Müller kicked off by reiterating the strict rules of the game:

“it is clearly defined in which china shop the elephant of monetary policy is not allowed – monetary state financing.” 

Clemens Fuest, Research Director at the Oxford University Centre for Business Taxation, shrugged his shoulders and replied:

“If OMT is ECB’s commitment to buy state bonds to a non-defined extent, than I wouldn’t know how to prevent the contact with the china shop”  

Being slightly more direct (as might be expected), Head of the Ifo Institute Hans-Werner Sinn said that the ECB engages in “regional fiscal policy” and that the Central Bank’s OMT programme is basically “a free insurance for investors when a state goes bankrupt”.

It's clear the Court remains concerned that the ECB could overstep its mandate. President of the Court Andreas Vosskuhle suggested that the current conditions attached to the OMT, the ECB’s bond-buying programme, are on a “very abstract level” but if correctly applied “could be a good middle way…of distinguishing between monetary and fiscal policy”.

A rather diplomatic construction but conditionality is a key issue here, as we’ve pointed out. The fundamental problem is that since there is no legal documentation and the OMT has never been tapped, it is very challenging for the court to judge how strictly the conditions will be applied. They could make a value judgement over whether they trust the ESM and eurozone politicians to fully implement the conditions but this could well be beyond the scope of the legal judgements the Court is allowed to make.

As Süddeutsche Zeitung's Markus Zydra points out, there is significant ambiguity around one of Asmussen's key points - that the OMT is practically limited since it can only purchase short term bonds. This is especially true given ECB President Mario Draghi's (and other's) previous remarks that there are no ex-ante limits to the OMT. Chief economists of DZ Bank Stefan Bielmeier put it nicely saying, “there is a dual rhetoric of the ECB…[they] tell everybody what they want to hear” - exactly as we noted here.

A running theme of the coverage following day two has been the signfiicant time given to those arguing against the ECB. ECB proponents reportedly told Handelsblatt “we feel like at an away game”, given the level of opposition support. The paper even goes so far as to question the neutrality of the court's referees given the line-up of known ECB critics it had called to provide evidence at the hearing (e.g. Hans-Werner Sinn, Kai Konrad, Harald Uhlig, Franz-Christoph Zeitler, Clemens Fuest).

How the Court will rule remains to be seen. It's clear they have some serious concerns about the policies but are struggling given the hypothetical nature of the case - the OMT remains undefined and unused, so any claims against it rely on second-guessing its implementation. Ultimately, it could be a question of whether they take the ECB at its word or not. Approval of policies but with some extra constraints remains the most likely outcome.

A final ruling is due for September although many involved expect a delay until after the German Federal Elections on 22 September. In the meantime, there are already those calling for a re-match in Luxembourg.

Splits in Germany (and beyond) over banking union?

It’s been a week of 'splits' over Europe and it looks like another one may be emerging – although this time in Germany.

German Finance Minister Wolfgang Schäuble had an article in the FT arguing:

"While today’s EU treaties provide adequate foundation for the new supervisor and for a single resolution mechanism, they do not suffice to anchor beyond doubt a new and strong central resolution authority.

We should not make promises we cannot keep. The overly optimistic predictions about a single supervisor starting work as early as January 2013 cost the EU credibility.

A two-step approach could start with a resolution mechanism based on a network of national authorities as soon as the new supervisor is operational, the resolution directive has been adopted and the Basel III capital requirements are in place.

A banking union of sorts can thus be had without revising the treaties, including a single supervisor; harmonised rules on capital requirements, resolution and deposit guarantees; a resolution mechanism based on effective co-ordination between national authorities; and effective fiscal backstops, also including the European Stability Mechanism as last resort."

Essentially, pointing out that a full centralised banking union is some time away, post EU treaty change. This potentially has implications for the UK, as much of Schäuble's solution, with the exception of the common eurozone supervision, would apply to all 27 members - the question for non-eurozone countries, including the UK, is how they will be affected by the 'second stage' of his solution. On the other hand, treaty change, as we've noted before would potentially enable the UK to put forward its own amendments.

However, German ECB Executive Board Member Jörg Asmussen espoused a different view in comments to the German press this afternoon:

"It is the aim [of the banking union] to make the Eurozone more robust against banking crises with an orderly, cross-border resolution of systemically relevant banks without leaving the burden on the taxpayer or the central bank."

"We think this is best ensured by a common resolution regime, a joint resolution fund that is financed by banks' contributions and a common resolution scheme…The entire tool kit should be available along with the Single Supervisory Mechanism."

So, much stronger on the need for a clear centralised authority as soon as possible, preferably when the ECB takes on its supervisory role at the start of next year. This also seems to imply then that such a move could be done without changing the EU treaties.

To be honest this is not an entirely new position, it is something other members of the ECB have previously called for. Nevertheless, it represents a fairly significant split between two leading political voices in Germany over what is now the key policy for reforming the eurozone.

It's also worth noting that at a press conference earlier today the Spanish and Portuguese leaders both put forward a similar argument to that of Asmussen on the need for an immediate 'full' banking union. Meanwhile, Eurogroup Head Jeroen Dijsselbloem said that the issue of treaty change could be dealt with "later on" but admitted that "understandable questions" were being asked on this front.

We, as with all those following the crisis, wait with bated breath for German Chancellor Angela Merkel to declare which side she comes down on. So far she has managed to dodge taking any big eurozone decisions ahead September's election in Germany, but with key discussion on banking union coming up next month its not clear whether she can continue to do so on this one.

Conflict of interest (rates): clamour for ECB rate cut grows but Germany remains wary

The last few days have seen a shifting of consensus in the ECB rate cuts debate.

Recent economic data in the eurozone has been particularly bad, with private sector activity slowing more than expected. However, potentially more importantly, this effect has been seen in Germany and some of the stronger northern countries as well.

In response to this data most banks and analysts shifted their expectations and now forecast an ECB rate cut in May or June.

The thinking goes that, a slowing economy in these countries (and therefore lower inflation) will give the ECB more scope to cut rates without fear of it having disproportionate effects on the stronger economies. After all, the ECB is meant to find a balance that suits all countries (although it rarely does, hence the flaw of one-size-fits-all monetary policy).

As always on central banking issues though, Germany remains the key player.

German Chancellor Angela Merkel has now waded in to debate about possible ECB action. Speaking at the conference organised by Sparkassen association this morning, Merkel said:

"The ECB is obviously in a difficult position. For Germany it would actually have to raise rates slightly at the moment, but for other countries it would have to do even more for more liquidity to be made available and especially for liquidity to reach corporate financing."

"If we want to get back to a bearable interest rate level, then we have to get over this internal division of the euro zone."

In a country where central bank independence is worshiped, politicians usually stay well clear of commentating on monetary policy, so Merkel's comments are quite extraordinary. Perhaps they were prompted by increasing noise coming out of the French government over what it sees as the need for the ECB to take a more activist approach, despite a genetlemen's agreement between the two governments not to discuss ECB policy in public.

German ECB board member Joerg Asmussen also weighed in yesterday saying:

"Monetary policy is not an all-purpose weapon for any kind of economic illness…Due to impaired monetary policy transmission, the pass-through of rate cuts to the periphery would be limited, and this is where they are most needed.

At the same time, rate cuts would further relax already unprecedentedly easy financing conditions in the core. This is not per se a problem – but interest rates that are too low for too long can eventually lead to distortions. In particular:

• to a misallocation of resources, which ultimately leads to lower potential growth,
• to excessive capital inflows into a number of emerging economies with exchange rate effects and credit risks,
• and to reduced incentives for governments, banks, and corporates to adjust."

For numerous reasons, it seems that a rate cut should not be taken for granted after all. Asmussen is  right that given the broken transmission mechanism and market fragmentation, any cut will have limited effect on the economies where it's meant to provide a boost. But more importantly, there is still a view in Germany that lower rates could have a harmful effect particularly by pumping up an asset and property bubble – similar to those seen when newly low ECB rates were introduced in the south during the euro's creation.

That said, the wave of voices calling for some ECB action is growing, particularly given the wider debate on austerity. It will be tricky to balance this with the demands of the northern countries.

Once again the ECB finds itself stuck as the main player in an increasingly political debate.