Photo Gallery: Axel Weber's Lonely Fight Against ECB Policy

Foto: ddp

Row Over ECB Handling of Euro Crisis The Lonely Fight of Monetary Dogmatist Axel Weber

The head of the German central bank, Axel Weber, is openly critical of the way the European Central Bank has handled the euro's debt woes. He is fighting to uphold purist monetary principles that are untenable in the current crisis. His chances of succeeding Jean-Claude Trichet as ECB chief are waning as a result.

Jean-Claude Trichet had chosen a complicated topic for his presentation. The president of the European Central Bank (ECB) stood on a podium in Frankfurt's Alte Oper opera house and talked about "macro-prudential regulation," "correlated risk positions" and "anti-cyclical capital buffers." These are dense subjects even for the bankers and financial experts in the audience, and a leaden sense of fatigue soon spread throughout the hall. Many listeners sank deep down into their seats, some stretched out their legs, and a few had drifted off to sleep.

One person, however, was wide awake in the front row. Axel Weber, the president of Germany's central bank, the Bundesbank, had brought along some work from the office. He fished documents out of a brown envelope, leafed through notes, studied diagrams and tables, and corrected manuscripts. Then he turned to the two smartphones that were lying on the table in front of him. Weber checked e-mails and the news, and typed out orders. Finally, he pushed back his chair, rushed over to his press officer on the other side of the room, and discussed how he should react to an agency report that he had just received.

Weber had accomplished quite a bit by the time Trichet finally stepped down from the podium amid a round of subdued applause. On the way to his seat, the ECB president had to pass by Weber. The German and the Frenchman shook hands, but the gesture seemed wooden and awkward. They didn't smile, they didn't look at each other, and they didn't talk. Then they walked off in opposite directions.

Last week, the European Central Bank reaffirmed its decision from last May to buy up government bonds from ailing EU member states  to support the euro. At the time, Weber had voted against the move and, riding roughshod over all the usual customs, had made his vote public.

The Pope vs Martin Luther

Since then, the euro zone has had one more problem: A religious war of sorts has erupted among the top officials of Europe's monetary authority, with Trichet cast in the role of the pope ("there is only one explanation and I give it") and Weber as Martin Luther ("I always go my own way, and it has served me well").

The two rivals are fighting with interviews and speeches -- with calculated indiscretions and public admonishments. The battle is about the currency's stability, the European Central Bank's image of itself and, last but not least, the presidency of the ECB.

Weber wants to succeed Trichet next fall as the head of the ECB -- and many people are wondering if that is still possible  now that the German has become one of the most controversial figures in the euro crisis. His supporters cheer him as a defender of German virtues in monetary policy, while his critics accuse him of promoting himself at the expense of the common currency.

Weber is fighting an election campaign the likes of which Europe has never experienced before, and it's clear that his campaign will force German Chancellor Angela Merkel to make a difficult decision: Should she support a man who is engaged in a bitter feud with the current incumbent? Does the European Central Bank need an agile diplomat or an intractable guardian of stability at the helm? And most important of all: Does it help the euro if Merkel endorses Weber's candidacy?

For Helmut Schlesinger the answer is clear: "Weber is right," he says, "with its decision, the European Central Bank has crossed the Rubicon."

Schlesinger is one of Weber's predecessors at the Bundesbank. He spent two decades on the bank's board and was its president from 1991 to 1993. He was one of the bank's legendary currency watchdogs and had a reputation for sniffing out inflation from under every pebble. In 1992, Schlesinger refused to lower German interest rates to keep the British pound in the European Monetary System. At the time, the political leadership in London accused him of "sabotage."

Schlesinger is now 86 years old. His hearing is not as good as it used to be, and he has to take off his glasses when he wants to write something down. But he's still on top of his game when it comes to monetary policy. The latest press reviews from the Bundesbank and economic journals are lying on his living room table. Schlesinger had hoped that the European Central Bank would unwaveringly pursue the same policies as the Bundesbank. But he has had his doubts ever since the euro started to stagger under the pressure of the current crisis.

"It was right to introduce a bailout package for Greece and the euro zone," he says, "but wrong for the European Central Bank to commit itself by showing a willingness to purchase government bonds."

In Schlesinger's opinion, this breaks a taboo commonly referred to in Germany as the Mefo bond. Mefo is an acronym for a shell corporation called the Metallurgische Forschungsgesellschaft (Metallurgical Research Company), which was founded by the Nazis. The company issued bonds which the central bank of the German Reich used in the 1930s to finance the country's military buildup. In order to ease the burden on the government budget, the Nazis started up the printing presses.

Schlesinger warns that something similar is now threatening to happen in the euro zone. "Apparently, outside Germany they haven't realized to what extent central bank financing of the (member) states erodes confidence in the value of the currency," he says. "This creates a dangerous incentive to continue to increase government debt."

The staff at the Bundesbank would have us believe that Schlesinger's cause is also Weber's cause. Their interpretation is that here is a man who is fighting as a matter of principle, out of a deep sense of concern for the stability of the currency and the independence of the ECB.

The image painted here by Weber's close advisers is a nice picture. But is it accurate?

It's a sin to print money to prop up a state budget -- that much is certain. The problem is that, in the wake of the financial crisis, this sin has been committed by the central banks of many countries, including the US and the UK. Shouldn't we also be allowed to temporarily violate principles in the euro zone if it means that this will save the common currency?

What's more, in his struggle to uphold principles, Weber considers it justified to break the rules himself, namely those of his office. As the German representative on the Central Bank Council, he should actually lobby for his cause internally, seek allies behind closed doors and otherwise behave in line with the fine traditions of the European Central Bank: Anyone who loses a vote still has to outwardly support the majority decision.

But Weber doesn't see himself as a diplomat, as he has made clear on a number of occasions. Weber has colored his term in office with the know-it-all air of the professor. He is not fighting for majorities -- he is playing to the experts in the crowd. He's not seeking to broker compromises -- he wants to prove that he is right. "It's not true that Weber believes that he is in possession of the truth," says someone who has known him for a long time, "he believes that he is in possession of the absolute truth." In late November, Weber gave a presentation at Berlin's swanky Hotel Adlon -- an excellent opportunity to show his mettle as a monetary statesman. Weber professed his commitment to "the euro -- the project of the century," juggled with jargon like "bondholders' squeeze" and "corporate governance," and called for realistic exchange rates between China and the US.

It was a successful presentation until a final question came from the audience. Max Otte, a professor of business administration at the University of Worms and a book author ("The Crash Is Coming"), tauntingly reminded the Bundesbank president that he had just noted the benefits of realistic exchange rates. Wouldn't it make sense, Otte asked, in this situation for Greece to leave the euro and devalue its currency?

There are roughly a dozen rebuttals to this question. Weber knows them all; he only had to choose one. But the head of the Bundesbank doesn't appreciate it when someone points out that he has contradicted himself. So he confronted his questioner head on, with sharp and cutting remarks. Weber said testily that it was his impression that Otte spent "too much time at political forums" instead of talking with industry representatives. Otherwise he would know to what extent German industry stands behind the euro, he said.

A Talent for Making Enemies

Weber loves to humiliate his adversaries -- and he takes it in stride that this causes the ranks of his opponents to continue to grow. When Weber rushed out of the hall after his presentation, Otte, shaking with rage, tried to intercept him -- and yelled in a choked voice after the Bundesbank president that he knew very well what the business sector thinks. After all, he said, he was an entrepreneur himself.

Anyone looking for examples of Weber's talent for making enemies only has to ask around at the European Central Bank. His opponents there cite a long list of transgressions. They reproach him for always voicing divergent opinions when Trichet makes public appearances. They complain that he makes far less critical comments at internal meetings than in public. They carp that in the past he didn't always so scrupulously adhere to his own noble monetary principles. They call him a "wannabe hawk."

But the more resistance the head of the Bundesbank faces, the more unrelentingly he plays the role of the rebel. When Trichet recently criticized Germany's plans  to make private investors share in the cost of government bailouts, Weber objected once again. He said that it made sense "not to make taxpayers foot the bill alone" for future cases of default.

Weber sees himself as the champion of Germany's interests and, indeed, the conflict in the upper echelons of the European Central Bank says a lot about the overall dilemma of Berlin's euro policy. The Germans often take the right approach on the issues, but they can't manage to turn this into a position that wins majority support. They are isolated, making themselves unpopular, and caught on the defensive -- just like Weber.

ECB Risks Becoming 'Bad Bank'

Since last week, it has been clear that the European Central Bank will, at least for the time being, continue to pursue its controversial bond purchasing program. However, in contrast to rumors that had been circulating earlier on the financial markets, the currency watchdogs have not committed themselves to expanding the program.

There are good reasons for this -- buying bonds entails significant risks. If the central bank purchases government bonds of troubled states on a large scale, it brings additional money into circulation. To avoid fueling inflation, the monetary authority in turn has to issue other bonds on the market to soak up the added liquidity. Economists call this procedure "sterilization."

Although this allows the central bank to limit the amount of money in circulation, it also creates an additional problem for the institution: the proportion of so-called junk books in its balance sheet increases. Those bonds are worth far less than their face value. Deutsche Bank chief economist Thomas Mayer warns that the ECB could turn into a "bad bank," with all the risks that entails. If the junk bonds end up having to be written down, he argues, this would also reduce the central bank's equity -- and the member states of the euro zone would have to inject fresh capital. This would spark a much larger spiral of debt and inflation.

Indeed, it was wise that the European currency watchdogs did not hastily expand the program last week. But it was just as intelligent not to deprive themselves of their ultimate weapon, because they may still need it if the turbulence surrounding the euro continues.

This is what Weber and the Bundesbank fail to appreciate in their campaign: The crisis of the common currency creates new priorities. Europe has to defend the euro, even at the cost of temporarily suspending proven principles.

A few weeks ago, Weber attended a banking congress in Frankfurt. Next to him sat Jörg Asmussen, a state secretary in the Finance Ministry. The two men greeted each other with a round of backslapping, spoke tête-à-tête for a long time, and showed the audience how perfectly they agree with each other, right down to the rhetorical figures of speech in their presentations: "Now I'm turning into the final curve," said Asmussen as he concluded his presentation. "Now I'm turning into the final curve," Weber said in his speech only half an hour later.

Sixteen years ago, the two men worked together at the University of Bonn, Weber as a professor of economic theory, Asmussen as a research associate. There was also another associate named Jens Weidmann.

The three men can pride themselves on building one of the most successful career networks in German economic history. When German Finance Minister Hans Eichel was looking for a new Bundesbank president in 2004, Asmussen -- who was a department head in the finance ministry at the time -- recommended Weber. Later, when Chancellor Merkel was looking for a new economic adviser, Weber recommended Weidmann. Now Asmussen and Weidmann are working in the German government to pave the way for Weber to become the ECB president.

Weber's Chances of Getting ECB Top Job are Waning

Until recently, it looked as if they were still in the running. Early this year, the EU governments made Portugal's Vítor Constâncio vice president of the ECB. In accordance with European rules on proportional representation, it was clear that the next president would have to come from a large northern member state, in other words, either Germany or France. Since the French can't occupy the top position after Trichet, however, the German candidate looked like he was in a strong position. Shortly thereafter, Paris said that it was also amenable to the idea of Weber as president.

That has changed. Ever since the conflict between Trichet and Weber escalated, the German's chances have dropped sharply. Every week, the French government brings up the names of new alternative candidates, and Chancellor Merkel has also not yet decided if she wants to fight for Weber.

According to government sources, if Berlin aims for the position, there will be no way around Weber as its candidate. But the question is whether Berlin really wants the office, especially considering the current difficult situation. It would also involve the usual game of string-pulling between European governments: If Merkel wants to ensure that Weber gets the job, she has to make concessions elsewhere.

As for Weber himself, he appears to be playing the tragic hero who is sticking to his principles: "I'm thinking of my current job," he says, "not the next one."

Translated from the German by Paul Cohen

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