The most interesting news out of Europe in a long time, via Reuters:
…tension is most obvious in the relationship between Draghi and Bundesbank President Jens Weidmann, which according to numerous officials who spoke to Reuters on the understanding they would not be identified, has almost broken down. But it goes further than that. According to German officials, Merkel felt betrayed by Draghi’s speech at a central banking conference in Jackson Hole, Wyoming in August in which he pressed Berlin for looser fiscal policy to stimulate the economy.
"Until now the ECB was confident, despite all the criticism in the German media, that it could count on Schaeuble and Merkel," said Marcel Fratzscher, the former head of international policy analysis at the ECB and now president of the DIW economic institute in Berlin. "But the recent criticism has been a real wake up call. There are questions about whether they have the full support of Berlin. The German criticism is a big concern for the ECB."
Weidmann has also not shied away from criticising the ECB chief’s decisions since then. But in the past months, mutual suspicions have grown, according to officials who know both men. A week after Coeure’s visit to Berlin, Draghi and Weidmann’s communications chief gave separate briefings on the same day to small groups of German reporters at an International Monetary Fund (IMF) meeting in Washington. Draghi listed all the ECB measures Weidmann had opposed since taking the helm of the Bundesbank. The Weidmann aide complained that the ECB president was keeping national central banks in the dark and not taking time to build consensus in the 24-member Governing Council, according to people who attended the briefings. Days later, at a Governing Council meeting in Frankfurt, the long-simmering row boiled over, with the two central bankers accusing each other of active sabotage through the media, according to one official familiar with the exchange. That evening, at the ECB’s annual cultural evening, held at the grand Alte Oper concert house in Frankfurt, the tension around them was palpable. "The relationship is totally rotten, it’s beyond repair," said a second official who knows them both. "It has become personal," a third official from the ECB said. "Whenever Draghi and Weidmann are somewhere at the same event, there are bets about whether their paths are going to cross. Weidmann avoids Draghi like the plague."
But even senior Bundesbank officials have begun to express concerns about the deteriorating relations between the two institutions. ECB Council members admit to being worried about hardening attitudes towards the bank in Germany, where supportive voices like Fratzscher have been drowned out by sceptics such as influential economist Hans-Werner Sinn and Holger Steltzner, the hard-line commentator for the Frankfurter Allgemeine newspaper, who dismiss the ECB as a "bad bank". "We will have to fight" to keep the Germans on board, said one member of the council.
One problem, officials says, is that since the departures of board member Joerg Asmussen and Draghi’s top adviser Christian Thimann last year, the ECB president has not had a German ally in Frankfurt who can spread his message in Berlin. Asmussen was replaced by Sabine Lautenschlaeger, an expert in financial regulation with no political experience, and Thimann’s post was taken by Frank Smets, a Belgian. This is why it fell to Coeure, who took over responsibility for government relations when Asmussen left, to make the trip to the Chancellery earlier this month. Frustrations have been exacerbated by Draghi’s leadership style, officials say. The Italian prefers to operate with a small group of confidants, led by Coeure and Peter Praet, the bank’s Belgian chief economist, rather than sounding out a broad range of views on the ECB Council, as Trichet often did.
Before his speech in Jackson Hole, Draghi sought advice from U.S. Federal Reserve Vice Chairman Stanley Fischer, his professor at the Massachusetts Institute of Technology in the 1970s, while leaving some ECB Council members out of the loop. According to one ECB source, Draghi has also clamped down on circulating policy papers to national central banks because they were often leaked. This close-to-the-chest approach has irritated others besides the Germans.
When the vast majority of countries in a union wants – nay, NEEDS something, and a single one of them says NEIN, the fairest thing to do for the greater good is to ignore it. It is unlikely that Draghi decided to go down this path without a plan. The lines are getting drawn – and the Germans will appreciate in fuller measure the ‘independent’ aspect of the ECB’s mandate. At this point, arguably the EU’s situation is so dire that most of the possible outcomes are favorable for EU ex-Germany over the long run. Either the Germans eventually decides to leave the EMU, and/or they don’t and the ECB eases further.
- EU Mfg PMI improved to 50.7 vs 49.9 exp and 50.3 prev. German strength offset French weakness
- EU Services PMI was stable at 52.4 vs 52.0 exp and 52.4 prev
- US Markit Mfg PMI
- Japan PMI improved to 52.8 vs 51.7 exp and prev
- China PMI was stable at 50.4 vs 50.2 exp and prev
EU Consumer Confidence
UK Retail Sales ex Autos declined -0.3% MoM vs 0.0% exp and 0.2% prev
US Jobless Claims rose to 283k vs 281k exp and 264k prev
FHFA House Price Index rose 0.5% MoM vs 0.3% exp and 0.1% prev
New Zealand CPI declined to 1.0% vs 1.2% exp and 1.6% prev
Saudi Arabia said to cut oil supply to market in Sept by 328k b/d – Reuters
Japan sold 3 month TBills at a negative yield for the first time.
- Fri: German GfK Consumer Confidence, UK 3Q GDP, US New Home Sales
- Mon: German IFOUS Markit Service PMI
- Tue: US Durable Goods Orders, Consumer Confidence, New Zealand Business Confidence
- Wed: Oil Inventories, FOMC, RBNZ, AU New Home Sales
- Thu: UK House Prices, German Unemployment, CPI, US Jobless Claims, 3Q GDP, NZ Building Permits, Japan Employment, CPI, UK Cons Confidence