European Central Bank President Mario Draghi rejected German criticism of the bank's super-loose monetary policy on Wednesday, calling sub-zero rates a necessity and urging governments including Germany's to share more of the burden.
Facing a grilling from German lawmakers who say the bank's monetary policy has damaged the euro zone and fueled the rise of the populist right, Draghi said Germans were net beneficiaries of the ECB's policies and action from governments, including Berlin, were a precondition for rates to rise.
After repeated clashes in recent years, a tentative truce between the bank and Europe's biggest economy is showing signs of cracking as the ECB contemplates even more stimulus despite vocal objections from the German establishment.
"On balance, savers, employees, entrepreneurs, pensioners and taxpayers across the euro area, including in Germany, are better off because of our actions - today and tomorrow," Draghi told the Bundestag's European Affairs committee, a day before he was due to hold talks with Chancellor Angela Merkel.
"What we need now is to allow our measures to develop their full impact," Draghi said.
Facing lackluster growth and the threat of deflation, the ECB has cut interest rates deep into negative territory and bought more than a trillion euros' worth of government bonds so far to cut borrowing costs and revive spending by firms and households.
With the economy responding to stimulus more slowly than expected, the ECB is now looking at fresh options to keep its 80 billion euro per month asset purchases running and markets are pricing in a six-month extension, much to the ire of Germans.
Many in financially prudent Germany argue that sub-zero rates upset financial stability, consume household savings, destabilize banks and reward financial mismanagement by euro zone governments.
"In fact, evidence shows that between 2008 and 2015 interest payments by households in Germany, as a percentage of gross disposable income, fell more sharply than interest earnings," Draghi said.
"Of course, low interest rates for a long period might carry the risk of overvaluation in asset markets as a result of the search for yield. But at the moment we are not seeing any overheating in the euro area or the German economy as a whole."
The ECB's calls for more government spending also annoys Germany, where balancing the budget is a national obsession and a cornerstone of Wolfgang Schaeuble's economic strategy.
The heart of the problem is that German households prefer uncomplicated savings products that now yield nothing, eating into the retirement prospects of millions and endangering hundreds if not thousands of small savings banks.
Political analysts argue that much of the criticism may also be a way of deflecting attention from Merkel's increasingly unpopular refugee policy and the poor showing of her Christian Democrats (CDU) in regional elections.
With a national election just a year away, Merkel is facing growing discontent, even from her coalition ally, raising doubts over whether she can lead her conservatives to a fourth election victory in a row.
Draghi struck a somewhat conciliatory tone earlier on Wednesday, admitting that the ECB did not yet fully understand the consequences of all of its actions, given that it was using novel and untested tools, so scrutiny was fair and welcome.
"Little is known to date of the distributional consequences of the unconventional tools we have used, either in respect of their impact or over the medium term," Draghi said.
In uncharted waters, closer cooperation is needed between fiscal and monetary policy to minimize side-effects, he added.
The ECB argues that Germany relies too much on exports, neglecting its internal market and running up huge trade surpluses without recognizing that its economic good fortune may not last. More spending at home would balance the German economy and trickle down to the rest of the euro zone, helping the entire bloc, it argues.
Underlining a lack of policy coherence among the euro zone's top economies, however, Italy hiked its budget deficit target for the second time in five months on Tuesday, a move that could set up a clash between Rome and Brussels.
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