Saving the Euro Germany's Central Bank against the World

Jens Weidmann, the new president of Germany's Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It's a lonely fight, however, and the pressure from Germany's European partners is intense. Some warn that Weidmann's course could end up destroying the euro. By SPIEGEL Staff.


An unsuspecting observer witnessing last Wednesday's meeting in room E 400 of the Paul Löbe House, a parliamentary building in Berlin, could have been mistaken for thinking it was the defense of a PhD thesis. The candidate, wearing a dark suit, sat down politely at a separate table, his youthful-looking face revealing a mixture of shyness and confidence. He folded his hands and placed them on the table in front of him, waiting patiently until someone addressed him. Sitting across from him, the members of the Finance Committee of the German parliament, the Bundestag, could easily have been a board of university examiners.

But the man being questioned was none other than Jens Weidmann, the 43-year-old president of Germany's central bank, the Bundesbank, and it didn't take long for his audience to realize that he should not be underestimated. Speaking in a quiet but firm voice, Weidmann delivered his assessment of the bailout policy of the euro-zone countries and the European Central Bank (ECB). In the end, it was Weidmann who was handing out the grades -- and they weren't good ones.

Politicians still hadn't done their homework, the Bundesbank president said critically. He assigned the blame for the crisis of confidence in the euro zone to politicians and said that they were jeopardizing the central bank's independent position. And then came the statement without which no German monetary watchdog can complete an appearance. The ECB, Weidmann said, has only one purpose, namely "to keep prices stable."

Growing Pressure

One man is bracing himself against the storm. In the battle to save the euro, Europe's monetary watchdogs are under growing pressure from around the world to buy up unlimited quantities of the sovereign bonds of ailing member states. But the head of the Bundesbank is saying no, and he is making his message loud and clear, not only in Berlin, but also in Brussels, Paris and Washington. If the ECB gave in to the pressure, Weidmann argues, it would not only be violating European treaties and the German constitution. Such a move would also be "synonymous with the issuance of euro bonds."

The crisis surrounding the common currency has reached a new stage. Less than two years after the Greek government first admitted that it was in deep financial trouble, Europe's politicians are running out of options to save the euro. They have already put together half a dozen bailout packages and come up with half a trillion euros. The heads of six governments have been toppled or have resigned. Many of the principles on which the common currency was once based have been violated, ranging from the ban on assuming the debts of other countries to the requirement to keep the euro zone's central bank out of politics.

Breaking the rules has become standard practice, but to no avail. Greece is closer to leaving the euro zone than ever before, and Italy seems to be drifting inexorably toward a national bankruptcy. No wonder that, last week, German Chancellor Angela Merkel once again found herself having to deny the rumor that Germany and France are already preparing for a split in the euro zone.

These are desperate times, so much so that most EU leaders feel that it is time to clear away the last remaining taboo in the euro zone. Until now, the ECB was only buying limited numbers of Portuguese, Spanish and Italian sovereign bonds to prop up the euro.

But if most European politicians have their way, in the future the ECB will vouch for all of the outstanding debt of the debtor nations, permanently, to an unlimited extent and in violation of all applicable laws. Their recipe is to print money and drown the debt crisis in a sea of liquidity.

Risk of Inflation

Weidmann believes that what many politicians see as the easiest solution would only exacerbate the problems. In his view, it would be "sweet poison" for the debtor nations, inconsistent with all of the Bundesbank's traditions and a means of government financing that has triggered a financial catastrophe in Germany once before, in the form of the hyperinflation of the 1920s.

For weeks, Weidmann's resistance has been the dominant topic at all financial summits. In Germany, the central banker knows that he enjoys the support of the majority of the population and most experts. But the pressure from abroad is growing. From US President Barack Obama to French President Nicolas Sarkozy to European Commission President José Manuel Barroso, all are urging the Germans to abandon their resistance to the ECB plan. The ECB, the London-based Financial Times wrote last week, must finally use its "silver bullet."

The stakes are high for the young monetary watchdog. Former Bundesbank President Axel Weber and ECB chief economist Jürgen Stark resigned in the midst of the dispute over purchases of government bonds, an issue they felt was increasingly isolating them within the ECB. They also felt abandoned by the government in Berlin. Weidmann, too, cannot feel confident about how long the government will support his position.

The chancellor and Finance Minister Wolfgang Schäuble, constantly under fire from their allies, would be only too happy to send a signal of their willingness to make concessions. As a result, the campaign of Germany's most important monetary watchdog has also turned into a personal struggle to assert his independence. A former adviser to Merkel's administration, Weidmann must now prove himself in the role of opponent to his erstwhile patrons.

Plenty of Space

A few weeks ago, the Bundesbank president was strolling through the headquarters of the International Monetary Fund (IMF) in Washington. The fall meeting of the IMF and the World Bank has just begun, and finance ministers, central bankers and senior government officials were chatting in the hallways. In the past, when he was still working for the administration as a department head in the German Chancellery, Weidmann consistently made a wide berth around the major stages, and was always prepared to react to a wave of the chancellor's hand.

Now, sitting on a large stage next to Finance Minister Schäuble, he took advantage of the opportunity to tease Merkel's most important cabinet member. "Did you deliberately leave so much space between us?" Weidmann asked. The podium was in fact very large, with practically enough space to accommodate a soccer team. "We did it because of your independence," Schäuble replied with a sarcastic smile.

The minister was feeling annoyed. He had just spent hours listening to his French, British and American counterparts pester him to finally agree to the use of the ECB to rescue the euro. But the man next to him was unmoved, as he mechanically recited the traditional mantras of the Bundesbank: "independence," "a culture of stability" and "credibility." The finance minister scrutinized Weidmann with a sullen look on his face.

Applying Lessons Learned in Berlin

Since Weidmann took office six months ago, he has not made the slightest impression that he is dependent on the chancellor and her administration. Only a few weeks after taking the helm at the Bundesbank, he went on the offensive against the euro members' bailout policy and also against the majority in the ECB's Governing Council.

In early August, the Bundesbank president voted against reinstating the ECB's bond purchase program and the plan to buy the sovereign bonds of Italy and Spain, which had come under financial pressure. But Weidmann was virtually alone in his position, with the overwhelming majority of the ECB council voting in favor of the measure.

It was a bitter defeat, but for Weidmann it was not a reason to abandon his resistance. On the contrary, he applied what he had learned in Berlin politics, and waited for a new opportunity to apply the brakes.

It would happen soon enough. Because the European Financial Stability Facility (EFSF) has only limited funds at its disposal, French President Nicolas Sarkozy sought to use a trick to provide it with access to the ECB's unlimited funds: The Luxembourg-based EFSF was to be converted into a bank. "Out of the question," Weidmann said testily. The plan would enable the central bank to indirectly provide unlimited sums of money to fund government budgets. The EFSF could deposit the bonds it had purchased as collateral with the ECB and receive fresh money in return, with which it could then buy even more bonds.

Weidmann objected, and this time key colleagues on the ECB Governing Council came to his support. In light of the resistance of German monetary watchdogs, the German government also supported Weidmann. There were certainly other ways to increase the EFSF's financial resources, Finance Minister Schäuble conceded.

Controlling the News Agenda

In his tenure as government adviser, however, Weidmann did not only internalize the art of political timing. He also learned that successes only count when they are appropriately packaged, such as the most recent dispute over the Bundesbank's so-called special drawing rights. These rights consist of billions in receivables that are counted as part of the Bundesbank's reserves and, like gold and foreign currency, can also be monetized.

The idea was that the countries of the monetary union should transfer their special drawing rights to Europe's bailout fund in order to make them available for rescuing the euro. Unanimity on the issue was already largely achieved at the G-20 summit in Cannes. France was in favor, as was the United States, the IMF had no problem with the idea, and even the other national central banks in the euro-zone countries had few objections.

But Weidmann did. First the Bundesbank president submitted his veto to his former boss, who then opposed the initiative. But that still wasn't enough for Weidmann. At the end of the summit, when the plan no longer played a role in Cannes, Weidmann leaked information about the discussions to the press, knowing full well that any attempt to touch the Bundesbank's reserves would cause a major upset.

He wasn't mistaken. A cover story in the heavyweight Frankfurter Allgemeine Sonntagszeitung newspaper was titled "And Now Our Gold." It didn't matter that there had never been any mention of the Bundesbank's bullion. Either way, Weidmann had won the battle, and he had also cleverly made sure that his victory would dominate the news agenda for an entire weekend.

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Eleos 11/15/2011
1. "Keep your head when all about you are losing theirs"
I have no doubt that history will see Jens Weidmann as a hero, one of the few with the courage to say that continuing to kick the can down the road will no longer do. I believe that many of his European colleagues secretly agree with him, but given the innumeracy which is today seen as a badge of honour, the gullibility of the public which has become addicted to instant hits, whether in a bar or on YouTube, and the sheer cowardice of politicians seeking to continue at the trough with smiles and insincere promises; it will be a difficult battle with many setbacks. 11/16/2011
2. Amazing
This is amazingly useful article for understanding the German attitude toward the current crisis. At the same time, it seems to me to betray a deep misunderstanding of the current crisis. It fails to distinguish between liquidity and solvency (Italy is solvent, but faces a liquidity crisis) and the difference between what is needed short term to bring down rates and what is needed long-term for fiscal health. To be sure, there is some connection. The crisis forces some decisions to be taken; simultaneously, it can make such decisions more difficult to implement, as borrowing costs go up and austerity brings negative growth, unemployment and less revenue. There must be a coordinated policy that indeed brings out the bazooka, which then will *not* need to be used (as happened here in the states). Otherwise, the Euro faces a death of a thousand cuts, which will harm Germany as well as her neighbors.
blankfiend 11/17/2011
3. Weidemann is Correct
Taken from my blog at "The overall concept would be for the ECB to morph into a FED-like role. It would become the lender of last resort to sovereigns in Europe. The Treaties establishing the ECB do NOT grant it this role with respect to sovereigns, but neither do they explicitly deny it. So, let's assume that market and political pressure lead the ECB to adopt the lender of last resort role. To begin with, if the ECB is going to take on a role like the FED's, it is worthwhile to compare the two institutions and the environments in which they operate. 1.The FED operates in a system with a federal republic and a central treasury and a single currency. The ECB operates in a monetary union with a single currency that is composed of individual sovereign nations and has no central treasury. 2.The central government in the US has the legislative authority to tax and to apportion funds. There is no such corresponding authority above the individual sovereigns within Europe. 3.The Fed loans to the US Treasury unconditionally. By "unconditionally," I mean that it is the Treasury that decides how to apportion and account for the funds, not the Fed. 4.The Fed operates in a system which issues bonds at its own level - the national level. There are no such equivalent bonds in Europe at the supranational level of the ECB. Obviously, these are critically important differences. When the Fed was established, institutions were firmly in place to arbitrate fiscal policy at the national level. National bonds were in place so that the Fed supports the sovereign on its own level, as opposed to from a level above it. The immense danger in having the ECB take on the role of the Fed derives from the fact that none of these institutions or instruments exist in Europe at the ECB's level. Hence, the ECB would not operate at the level of the countries it lends to, it would operate from a higher level, a supranational level. While the Fed's role as lender of last resort may be purely that, the ECB would have a critical vacuum to fill in a similar role. It would the ECB's decision as to who it lent to and, most critically, under what conditions. In the absence of a central fiscal authority at the European level, the ECB would be the institution to dictate conditions for receiving its funds. Those conditions could include debt/GDP targets, deficit reduction targets, enforced austerity measures, labor market measures, etc. In fact, such demands have already been made, the latest occasion being a letter from Trichet to Italy in late September demanding certain actions. Given the lack of a supranational Eurobond, the ECB would also have the power to decide whose bonds it would purchase and whose it would sell. In short, the ECB would become the central government of Europe, and an unelected and opaque one at that. The take away point: The Fed is a monetary authority, while the ECB would be both a fiscal and a monetary one. While the Fed may be the USA's lender of last resort, the ECB would be Europe's paymaster/treasurer. Whether the elected leaders of European nations will allow their citizenry to be subjugated to such a powerful unelected bureaucracy, and whether the citizens will stand for it, remains to be seen.... "Give me control of a nation's money and I care not who makes it's laws" -Mayer Amschel Bauer Rothschild "Whoever controls the volume of money in any country is absolute master of all industry and commerce." -James A. Garfield, President of the United States" The BOTTOM LINE: Is the Euro worth saving? If so, then governments need to put their taxpayers' money to work through a democratic and open process. If the taxpayers refuse, then the Euro must not be worth saving. It is not up to the unelected bureaucracy of the ECB to make such monumental, far-reaching decisions.
alfredmifsud 11/17/2011
4. A Fire engine without water
Who needs a fire engine without water? I cannot stand the false puritanism of the Bundesbank in particular and the Germans in general. They were the first to break the Stability and Growth Pact and when it suited them they had no qualms is putting aside the rule book. They are a main source of the current problem as the ECB kept interest rates low to suit German needs for integrating the East when such rates were totally unsuitable to the economic tempo especially in Ireland and Spain. The ECB closed both eyes to the asset price inflation going on in boom times in many Euro countries outside the German block and narrowly interpreted their mandate on retail price inflation rather than on the wider meaning of inflation including capital assets. Now that the Germans are benficiaries of the Euro problems as their Bund rate is down and the Euro is much weaker than where the DM would be, now the Germans want to teach a lesson to all the rest. The problem now is not inflation. The problem is a 1930's style depression if the Euro breaks up. Why do the Germans insist on fighting windmills? Yes many countries need strong political will to restructure their economies from the damage caused by the ECB through excessively low interest in the good times which permitted uncontrolled excessive borrowing. The damage caused by the Germans in throwing away the rule book when it suited them setting a bad example for the rest and removing the power of the Commission to impose discipline. However such restructuring cannot be done while the house is on fire. The ECB is the only institution that can put out the fire, but a fire - engine without water is useless. And it is simply not true that the ECB would lose authority over national governments if they slacken on their reform agenda. Simply by not buying their bonds they can impose discipline. Isn't that what Draghi did to send Berlusconi home? And it is much better for such discipline to be imposed by an autonous ECB council rather than by Chancellor Merkel dictating to other countries her political doctrine. It just looks abrasive and resentful foreign interference. If the Germans don't want to save the Euro they should start reading again the history books of the 1930's and 1940's. If they want to save the Euro than their choice is either allow the ECB to act as the true lender of last resort to countries that are successfully performing reform agendas or leave the Euro and go back to their beloved DM so they will lose their export competiveness and thus address the intra EU gross imbalances.
Eleos 11/18/2011
Zitat von jolaukat@gmail.comThis is amazingly useful article for understanding the German attitude toward the current crisis. At the same time, it seems to me to betray a deep misunderstanding of the current crisis. It fails to distinguish between liquidity and solvency (Italy is solvent, but faces a liquidity crisis) and the difference between what is needed short term to bring down rates and what is needed long-term for fiscal health. To be sure, there is some connection. The crisis forces some decisions to be taken; simultaneously, it can make such decisions more difficult to implement, as borrowing costs go up and austerity brings negative growth, unemployment and less revenue. There must be a coordinated policy that indeed brings out the bazooka, which then will *not* need to be used (as happened here in the states). Otherwise, the Euro faces a death of a thousand cuts, which will harm Germany as well as her neighbors.
Italy's problem is not liquidity. It is credibility. Markets and people do not believe that Italy will adopt sound fiscal policies unless it sees the alternative as worse. Elections in some European nations have recently become a choice between putting the left hand or the right hand into the German pocket. Only when politicians and people are seen to accept the conditions necessary to pay for the excesses of recent years will the situation alleviate. If they do not bankruptcy and departure from the Eurozone will, and should, follow.
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