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Germany seeks to control Europe, but Italian referendum could be a game-changer

BNP's Lemierre: Two sides to ECB negative rates policy

Mario Draghi, the ECB's President, was pleading last Wednesday for a European Europe, in a closed-door session with a hostile group of German parliamentarians. He was fending off Berlin's ceaseless attempts to capture the world's only truly independent central bank.

Europeans are lucky to have a man of Dr. Draghi's integrity and professional competence, a remarkable leader hailing from a country that is still home to Europe's true believers.

Here is the background to this latest episode in the ECB's long-running saga with German authorities.

Having thrown millions of Europeans into unemployment, poverty and destitution with the imposition of harsh fiscal austerity on countries already choking under recessionary pressures, Germany continues to challenge the ECB's conduct of independent policies with instruments and credit intermediation channels that are strictly within its mandate.

Draghi's master class

The struggle to dominate the ECB has long roots. People still remember the EU summit in Dublin in December 1996, when the French President Jacques Chirac and German Chancellor Helmut Kohl had to be physically separated as they were hurling insults at each other because Germans wanted to impose their man to lead the bank.

In spite of subsequent attempts to patch up the differences, the German quest for control of euro area monetary policies went on. And when it became clear that the ECB would not toe the German line, a fracas followed with protest resignations of German representatives to the ECB's governing council in February and September 2011.

To underscore its displeasure, Berlin also sued the ECB for allegedly transgressing its mandate in the German Constitutional Court and to The European Court of Justice. Germany lost these cases.

ECB started QE easing too late: Austrian fin min

So, what happened in Berlin last Wednesday was a continuation of a power play that Germany could not possibly win.

According to media reports, maestro Draghi easily disposed of Germany's two frontal assaults by showing that "between 2008 and 2015 interest payments by households in Germany, as a percentage of gross disposable income, fell more sharply than interest earnings," and that allegedly serious problems at Germany's large banks were caused by reasons other than the ECB policies.

Most of the rest of his discussion was probably way over the heads of that particular audience, but he did tell them something they could understand. Germany's systematic and excessive trade surpluses, he said, were a problem for the proper functioning of the monetary union; a stronger domestic demand in Germany was also needed to help other euro area countries to recover and grow faster.

And here is the punch line of Mario Draghi's German hearing session. In an apparent rhetorical flourish, he told the Germans that the easiest way to get rid of zero interest rates (which they dislike so much) would be to turn to growth-oriented economic policies that would end price deflation.

The euro area investors wondering where all this is going may wish to hear some thoughts on that by Jean-Claude Juncker, the President of the EU Commission – a man who went public with a statement that "Europe is a love of my life."

Economic control is political control

In an interview with a widely read German magazine, Mr. Juncker pointed out that the way Berlin treated Greece "has left deep wounds there," and that "Italian elections (in February 2013) were excessively anti-German." He concluded by saying that "anyone who believes that the eternal issue of war and peace in Europe has been permanently laid to rest could be making a monumental error. The demons haven't been banished; they are merely sleeping …"

Juncker's thoughts on German attitudes toward the euro and the monetary union are equally sobering.

As the longest-serving chairman of the Eurogroup (a forum of euro area finance ministers and an informal euro area economic government) he knew what he was talking about when he aired this lament in the French daily Le Figaro at the height of the euro crisis in July 2012: "How can Germany have the luxury of playing its domestic politics on the back of the euro? If all the other countries did the same thing, what would happen to our common project (European economic and monetary union)? Is the euro area just Germany's branch office?"

German Chancellor Angela Merkel and Mario Draghi, pictured a month before Draghi took over as president of the European Central Bank in November 2011.
Ralph Orlowski | Getty Images

That is what many Europeans worry about. Italy is now strongly opposing Germany's euro area austerity and migration policies. The referendum on Italy's constitutional reforms in early December will be a vote on government's failure to lift the economy out of stagnation and to help people out of poverty, unemployment and deteriorating public services. In spite of that, Berlin continues to thwart Rome's attempts to stimulate growth and job creation.

France? Forget it. They are calling Alain Juppé, the current front-runner in next presidential elections, a "tisane" – a man as inspiring and energizing as a decaf herbal infusion. But whether that will open more space for the feisty Marine Le Pen of the Front National remains to be seen.

Either way, though, Germany is an election issue because it is seen as a humiliating arbiter of French economic policies – an area of public policy the French voters thought was a matter of their sovereign right.

Central Europeans are stirring up too. Hungary is leading the opposition to Germany's unilaterally decreed refugee/migrant policies. That opposition is at the core of a number of other serious grievances levied at Berlin and Brussels by the gutsy Visegrad Group (Poland, Hungary, Czech Republic and Slovakia).

Investment thoughts

The recently departed Helmut Schmidt, Germany's former chancellor and an old sage of German and European politics, used to advise his compatriots to be more sensitive toward their fellow Europeans. Referring to Germany's bulging foreign trade accounts, he would remind them that "our surpluses are their deficits."

Schmidt, a true renaissance man and a virtuoso pianist (with fine recordings of Bach and Mozart), was the architect of the euro, along with his close friend and former French President Valéry Giscard d'Estaing, during the most difficult phase of that epochal project. But he did not boast, like one of his successors, that "Der Euro spricht deutsch" – the euro speaks German, or "My way or highway," in New York vernacular.

In her eulogy of Mr. Schmidt last November, Chancellor Angela Merkel called him a "Referenz" – the ultimate "go-to" authority.

Mr. Schmidt knew that those who control the economy also control the politics. In his dealings with Giscard d'Estaing during many French financial crises, he showed that Germans should not go that far. But he was never sure whether Germans understood that. When, at the age of 94, he came to Paris in early June 2013 to take leave of France and his friend Valéry, he still seemed to struggle with that doubt as he insisted that Germany should never act alone – "it should never do anything without France."

That Germany is gone, but I am sure Berlin will get back on a more constructive European track. Meanwhile, European leaders with spine and brains have a smart and unflinching ally in the Draghi-led ECB.

Hedge your euro bets. Italy's referendum (next December), and French and German general elections (May and September 2017, respectively) are potentially game-changing events.

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