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.

Photo Gallery: The Lonely Struggle of Jens Weidmann Photos
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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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