By Edward Taylor and Kathrin Jones
FRANKFURT (Reuters) - Chancellor Angela Merkel's main challenger in next month's German election criticised ECB President Mario Draghi's pledge to keep interest rates at record lows for an extended period, saying the move put savers in an "unspeakable situation".
In an interview in Frankfurt, Peer Steinbrueck, a former finance minister fighting to oust Merkel in Germany's September 22 national election, also took aim at large banks, corporations and tax havens in an effort to revive his flagging campaign.
In rare criticism of the independent European Central Bank by a leading German politician, the Social Democrat candidate told Reuters savers faced a creeping "expropriation" of their money by inflation that is running higher than interest rates.
"That is an unspeakable situation so I am very sceptical about Mario Draghi's move to announce such a low interest rate policy - almost a policy of zero interest rates - for the ECB for the coming years," Steinbrueck said on Tuesday.
Breaking with precedent, Draghi declared last month the ECB would keep interest rates at record lows for an extended period and may yet cut further. Draghi did not elaborate on the exact duration of the ECB's policy of keeping rates low.
Steinbrueck voiced concern about the possibility of a further haircut on the debt of fellow euro zone member Greece because it would burden "official" lenders such as the ECB.
"In my view, next time not only private owners need to participate, but also the official sector, and this could be awkward for some - such as the ECB," he said, adding that revaluing its Greek debt holdings could put a strain on the ECB's capital position.
Private owners of Greek debt were forced to swallow significant losses on their holdings last year, but European governments and the ECB, which bought up Greek bonds at the height of the crisis, have so far avoided taking a hit.
A key pillar of Steinbruck's campaign, in a nod to the left wing of the SPD which had doubts about selecting the former minister in Merkel's 2005-2009 'grand coalition' government to challenge her, has been to denounce what he calls the "dictatorship of financial markets".
"There are many European banks whose balance sheets need to be cut, and there are some which may need to be wound down," Steinbrueck said, reviving a call to create a pan-European bank resolution mechanism.
Steinbrueck dismissed concerns that creating a bank rescue mechanism may be unlawful, but argued that such a fund must not be set up using taxpayers' money.
German Finance Minister Wolfgang Schaeuble has said the bank resolution proposal is out of step with EU law and argues that a change to the EU Treaty would be needed for a bank rescue agency to get executive clout.
Steinbrueck said he would seek to beef up proposals to separate retail and investment banking activities, in an effort to shield clients' savings in the event of a bank collapse.
"The current bank separation law in Germany is insufficient. It only impacts two or three percent of bank balance sheets in Germany," he said, standing atop the Helaba tower in Frankfurt overlooking skyscrapers including the ECB's headquarters.
"There is no clear separation between depositors and investment activities," Steinbrueck said.
He revived a call to force mergers among Landesbanks, the regional public-sector banks which belong to state governments and whose main purpose is to support the local economy.
"The greatest need for consolidation is in the Landesbank sector," Steinbrueck said, declining to elaborate on how this could be brought about.
Asked when Germany should sell its 17 percent stake in the country's second-largest lender, Commerzbank, he said this partly depended on the expected return on the investment, adding that the priority would be not to make a loss.
Steinbrueck said he would aim to make it harder for large corporations to avoid paying taxes, calling it a "scandal" that big companies have an effective tax rate of under 10-15 percent.
He would also consider reviving talks with Switzerland about reaching a dual-taxation agreement, but on what he said would be "different terms" than those offered by Schaeuble.
(Reporting by Edward Taylor and Kathrin Jones; Editing by Stephen Brown and Paul Carrel)