Currency Crisis German Central Bank Opposed to Merkel's Euro Course

The new Bundesbank president, Jens Weidmann, used to be one of Merkel's closest advisers. Now, he is one of her staunchest critics over the euro rescue. He is strictly opposed to the European Central Bank's policy of buying up bonds from debt-stricken countries -- and is winning a growing number of allies for his cause. By SPIEGEL Staff.

Jens Weidmann has gone from one of Merkel's closest advisers to one of her staunchest opponents.
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Jens Weidmann has gone from one of Merkel's closest advisers to one of her staunchest opponents.


Jens Weidmann knew what would happen, but he had to make the joke anyway. He owed it to himself and to his new position as head of the Bundesbank, Germany's central bank.

"Did you leave so much space between us on purpose?" he asked German Finance Minister Wolfgang Schäuble with a cheeky grin. Indeed, the podium that had been set up for their joint press conference on Friday in Washington really did have generous dimensions, leaving enough space for two or three people between them.

Schäuble examined the distance between them. Then he answered, with a pained smile: "We did that because of your independence."

One of Merkel's Fiercest Adversaries

Germany is marveling at a breathtaking shake-up of political roles. For five years, Weidmann served as an economic adviser to Chancellor Angela Merkel. During that period, he was loyal to her, even seeming too keen at times. But now, in his new role as president of the Bundesbank, he has become one of her fiercest adversaries.

Weidmann has criticized decisions related to the euro bailout as "inconsistent" and "highly risky." He has called on politicians in Berlin to change their course, and he has been advocating "the Bundesbank's principles regarding stability." All of those things put him at odds with top officials at the European Central Bank (ECB).

Behind the glass facade of ECB headquarters in Frankfurt, a fierce battle over fundamental beliefs has been smoldering for months. ECB President Jean-Claude Trichet and the majority of his colleagues are willing to rush to the aid of embattled EU finance ministers and to make major purchases of the sovereign bonds of debt-ridden euro-zone countries, such as Greece, Portugal and Italy.

For his part, Weidmann is strictly opposed to these measures. He believes they amount to an unacceptable means of financing states through effectively printing money. In fact, he has come to assume the mantle of the last staunch defender of monetary stability.

His views were shared by his predecessor, Axel Weber, and the ECB's former chief economist, Jürgen Stark, both of whom stepped down from their positions because it was getting lonelier and lonelier on their side of the battle.

Weidmann, on the other hand, plans to keep fighting -- and in full public view. He gives speeches and interviews, like the one he gave to SPIEGEL last week. He riled Europe's finance ministers at their most recent summit in the Polish city of Wroclaw. And he has been having serious talks with the members of the budget committee of the Bundestag, the German parliament. Indeed, in an unprecedented campaign, Weidmann is trying to rally a majority of ECB council members to re-adopt the monetary-policy principles that Germany has traditionally championed.

'I Hope Weidmann Succeeds'

Having a Bundesbank president as the leader of the opposition on monetary policies is something that has seldom happened before in the subtle and sophisticated world of central bankers, who like to cloak even their fundamental decisions in opaque hints and insinuations.

Indeed, the game that Weidmann has started is a risky one. If he gets his way, the ECB could emerge from its worst-ever crisis even stronger than before. If he fails, the Bundesbank's positions on monetary policies might be buried for good.

"I hope Weidmann succeeds," says Thomas Meyer, the chief economist at Deutsche Bank, Germany's largest bank. "But I wouldn't bet on it."

Ironically, one of the things threatening Weidmann's chances of success is his popularity among Germans, who have gotten plenty of exposure to the young Bundesbank chief in recent days. He has become the new star of the euro crisis.

On Sept. 13, for example, Weidmann swept into a packed hall in Cologne's elegant Hotel Barceló to deliver a speech at the invitation of the ASU, an association of family-owned businesses in Germany. Dozens of executives from companies based all over Germany sat on chairs with gilded frames while ASU President Lutz Goebel, the head of a motor company in Krefeld, set the tone for the event. Goebel complained that some of the teetering countries in the euro zone had "no business model" and that Germany's government was constantly throwing "good money after bad."

Weidmann's voice also grew louder as he approached the key passages in his 23-page speech. The balance sheet of the ECB is "burdened with significant risks" because it has purchased sovereign bonds, he said, adding that he would advocate against any expansion of this policy "under any circumstances."

In his closing, he stressed that "with or without others fighting by my side, this stance will remain." The speech was received with thunderous applause.

The Stereotype of a Technocrat

Weidmann is playing a role he does not necessarily look cut out for. With his Ph.D. in economics and neatly parted hair, he seems like the stereotype of the cool-headed technocrat. In his steep rise from being a division head at the Bundesbank to a senior civil servant in the Chancellery, he knew not to force himself and his opinions into the spotlight.

These days, Weidmann is the most influential critic of Merkel's bailout strategy. This change has led the chancellor to follow her former aide's campaign at a cool distance. Merkel has nothing against the fact that Weidmann's new job makes him the champion of the Bundesbank's traditional positions. But that doesn't mean she's going to support him. On the contrary, sources close to Merkel say that, at their most recent summit, European leaders expressly approved the ECB measures that she backs and Weidmann opposes.

This forces Weidmann to rely on finding allies on the ECB council who will back his position. Doing so isn't completely out of the question, however, as the most recent purchases of sovereign bonds have triggered growing unease among some people in the ECB.

In early August, after having already purchased the sovereign bonds of Greece, Portugal and Ireland, the ECB decided to also buy Italian ones for the first time. The measures were meant to help Italy scare off speculators and to apply lasting pressure to keep interest rates on Italian debt low.

Since then, the monetary watchdogs have come to fear that they are throwing their money into a bottomless pit. Indeed, despite having already purchased over €150 billion ($200 billion) in sovereign bonds, there is no success on the horizon. Every time Trichet's securities traders stop buying, the interest rates start going back up. In this way, what was originally envisioned as emergency assistance has turned into long-term subsidization.

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alfredmifsud 09/26/2011
1. Don't just oppose!
It's understandable that the new chief of the BUBA wants to stick to conservative tradition and abort the ECB's intervention to support Euro countries in distress by buying their bonds. But does this mean that they prefer to see cuntries like Greece default with all the consequences of contagion and blow up of the EURO EU and the economies of Europe and beyond? I also am against the ECB intervening to buy bonds.But given that European bureaucracy with 17 parliaments having to approve each deal moves at totally irrelevant pace to the speed of the market, the ECB is the only pan EU institution that can match market speed and keep the system afloat while politicians sort out their bureaucracy. Abnormal times call for abnormal measures. The only alternative to bond buying is creation of a Fund for recapitalisation of EU banks, forcing such banks to mark to market their svereign holdings, recapitalise them in a way of quasi nationalisation without compensation, and then organise a grand debt exchange offer which reduces the debt of troubled countries and gives them an incentive to persue real restructuring under pressur from the ECB. Private shareholders in banks would be wiped out in order to save the skin of governments. This would open grave cases of legal disputes as governments would frist ruin their banks through their own economic mismanagement and than sacrifice bank shareholders to cut their debt burden. Is this was the BUBA president would prefer?
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