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.

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