German Chancellor Angela Merkel may have sought to score political points by slamming central banks this week, but she also echoed fears over growing public debt and waning bank independence.
Merkel shocked financial markets when she said in Berlin: “We need to get back to an independent central bank policy and a policy of common sense.”
Her rare criticism singled out the US Federal Reserve, as she expressed skepticism over “the extent of the Fed’s powers,” which include the authority to buy US$300 billion in government and private debt.
Merkel’s remarks came days before a rate decision by the European Central Bank (ECB). The ECB, she said, had “bowed to international pressure with its purchase of covered bonds,” a non-conventional measure to boost credit markets.
The comments also preceded a European Parliament poll this weekend and a general election in Germany in September, prompting the Financial Times to call her comments “political point-scoring.”
But the German chancellor’s warning that monetary policy was out of control was welcomed by the Wall Street Journal, which said her “broadside” against the Fed, the Bank of England and the ECB was “timely.”
“Central banks should halt the printing presses before the real damage is done,” the US daily warned.
Merkel and others in Germany feel that pushing up deficits to fight the economic crisis will fuel inflation and sow the seeds of the next crisis.
By buying government debt, some economists say the Fed and Bank of England have surrendered independence that Germans cite as a key factor in a healthy economy.
“There is no real autonomy or independence of the Fed any longer in my view,” UniCredit economist Andreas Rees said. “This is dangerous.”
Meanwhile, “Germans are traumatized by the hyper-inflation in the 1920s,” which helped bring the Nazi party to power, Barclays Capital economist Torsten Polleit said.
“Americans are traumatized by the Great Depression, by deflation,” he said.
Unsurprisingly, Merkel also got the attention of central bank chiefs, with Fed Chairman Ben Bernanke telling a US congressional panel the next day: “I respectfully disagree with her views.”
Bernanke nonetheless warned US lawmakers against failing to rein in a huge budget deficit, saying: “We cannot allow ourselves to be in a position where the debt continues to rise.”
ECB President Jean-Claude Trichet said on Thursday he had spoken with Merkel and was pleased she “was fully backing our independence and appreciated what we were doing.”
Trichet said he and Merkel agreed that governments must be set to reverse the effects of economic stimulus plans quickly once the eurozone’s recession was clearly receding.
“Exit strategies are of the utmost importance,” the ECB chief said.
Financial markets have signaled concern over soaring government debt, as seen in a sharp hike in the yield on US Treasuries and rising momentum of inflation expectations, which nonetheless remain at reasonable levels for now.
“The psychological shift can happen more rapidly” than policymakers expect, Timo Klein at IHS Global Insight Polleit said: “If the program like the one the Fed has announced to keep buying and monetize government debt [continues], the problem will really start to kick in.”
He said that “over the next four to five years, there is just one direction in terms of public debt: It will go up” because “the majority of the public and politicians see government handouts as basically necessary.”
Against such a background, Merkel’s bombshell could benefit the ECB, Klein said.
“In a way, Merkel is actually strengthening the position of the European Central Bank,” he said, by backing those who feel the bank was “coaxed into additional steps by the example of the Fed and the Bank of England and others.”
The US dollar was trading at NT$29.7 at 10am today on the Taipei Foreign Exchange, as the New Taiwan dollar gained NT$1.364 from the previous close last week. The NT dollar continued to rise today, after surging 3.07 percent on Friday. After opening at NT$30.91, the NT dollar gained more than NT$1 in just 15 minutes, briefly passing the NT$30 mark. Before the US Department of the Treasury's semi-annual currency report came out, expectations that the NT dollar would keep rising were already building. The NT dollar on Friday closed at NT$31.064, up by NT$0.953 — a 3.07 percent single-day gain. Today,
‘SHORT TERM’: The local currency would likely remain strong in the near term, driven by anticipated US trade pressure, capital inflows and expectations of a US Fed rate cut The US dollar is expected to fall below NT$30 in the near term, as traders anticipate increased pressure from Washington for Taiwan to allow the New Taiwan dollar to appreciate, Cathay United Bank (國泰世華銀行) chief economist Lin Chi-chao (林啟超) said. Following a sharp drop in the greenback against the NT dollar on Friday, Lin told the Central News Agency that the local currency is likely to remain strong in the short term, driven in part by market psychology surrounding anticipated US policy pressure. On Friday, the US dollar fell NT$0.953, or 3.07 percent, closing at NT$31.064 — its lowest level since Jan.
The New Taiwan dollar and Taiwanese stocks surged on signs that trade tensions between the world’s top two economies might start easing and as US tech earnings boosted the outlook of the nation’s semiconductor exports. The NT dollar strengthened as much as 3.8 percent versus the US dollar to 30.815, the biggest intraday gain since January 2011, closing at NT$31.064. The benchmark TAIEX jumped 2.73 percent to outperform the region’s equity gauges. Outlook for global trade improved after China said it is assessing possible trade talks with the US, providing a boost for the nation’s currency and shares. As the NT dollar
The Financial Supervisory Commission (FSC) yesterday met with some of the nation’s largest insurance companies as a skyrocketing New Taiwan dollar piles pressure on their hundreds of billions of dollars in US bond investments. The commission has asked some life insurance firms, among the biggest Asian holders of US debt, to discuss how the rapidly strengthening NT dollar has impacted their operations, people familiar with the matter said. The meeting took place as the NT dollar jumped as much as 5 percent yesterday, its biggest intraday gain in more than three decades. The local currency surged as exporters rushed to
RSS