Between devil of toxic bonds, sea of euro collapse

BUNDESBANK chief Jens Weidmann is not a stickler just for the sake of it. His resistance to more radical European Central Bank (ECB) action to tackle the eurozone crisis stems from concerns about the longer-term implications of the ECB taking greater risks, and from intense pressure from conservative forces in Germany.

The 44-year-old took the helm of the German central bank last year after his predecessor, Axel Weber, quit in protest at the ECB’s bond purchase programme — a plan Mr Weber believed effectively financed governments, and Mr Weidmann has since stalled.

Now Mr Weidmann is under pressure to drop his resistance to a more interventionist ECB role that may involve buying state bonds after ECB president Mario Draghi pledged last week to “to do whatever it takes to preserve the euro”.

The two men met for coffee this week “to exchange ideas” before the ECB governing council’s policy meeting tomorrow — at which Mr Draghi must back up his pledge to protect the euro or else disappoint investors.

Mr Draghi also met in Frankfurt on Monday with US Treasury Secretary Timothy Geithner, who has long urged bolder steps to tackle the crisis.

Mr Weidmann is aware that the future of the euro is at stake and that doing nothing could result in a breakup of the currency bloc — a scenario that would be hugely costly for Germany. But he also needs to retain the trust of risk-averse Germans.

“He has to be very careful not to lose this reputation of being the stability anchor within the ECB and within the eurozone,” said Clemens Fuest, research director at Oxford University’s Said Business School and an adviser to Germany’s finance ministry. “There is this whole anti-inflation mood in Germany and he has to represent that.”

Mr Weidmann worries that a wider, more activist role for the ECB would dilute debt-laden governments’ incentive to reform, and lumber the central bank with too many risks and responsibilities, endangering its independence and credibility.

The Bundesbank’s approach to monetary policy is grounded in an institutional culture of “Ordnungspolitik”, a dogma in which the role of a totally independent central bank is to ensure stable prices, not to promote economic growth and employment or to help states with fiscal problems.

This narrow, inflation-fighting focus helped the Bundesbank, founded in 1957, to become a model for central bank independence in the years that followed, when it was hugely powerful. Those values were initially hard-wired into the ECB’s DNA.

There is this whole anti-inflation mood in Germany and Bundesbank president Jens Weidmann has to represent that

But the absence of a European fiscal authority and the inability of eurozone governments to overcome the bloc’s debt crisis have left the ECB as the only federal European institution able to act with sufficient speed and firepower to be effective — and it is morphing as a result.

The ECB began sailing into uncharted waters under the Italian Mr Draghi’s predecessor, Frenchman Jean-Claude Trichet, who launched the bond-buying Securities Markets Programme in May 2010 despite the opposition of Mr Weber and another German on the policy-making governing council, Juergen Stark.

Going beyond its price stability remit, the ECB has since flooded banks with €1-trillion in cheap, three-year loans, bought €211.5bn of government bonds, and repeatedly loosened its collateral rules to now accept all kinds of paper, from mortgage-backed securities to car loans and consumer finance contracts, as surety.

The Bundesbank believes ECB bond-buying flouts European law ban- ning monetary financing of governments. Mr Weidmann often says that undermining the rules on which the single currency bloc was founded is no way to stabilise the eurozone.

His private differences with Mr Draghi became public in February when a letter he wrote calling for a return to stricter precrisis collateral rules was leaked to the Frankfurter Allgemeine Zeitung, voice of the archconservative establishment critical of eurozone bail-outs and ECB crisis management.

While he is less outspoken in public than Mr Weber, Mr Weidmann is the biggest obstacle to bolder ECB action. His opposition to policy options such as ECB bond-buying stems from a fear that it will simply lull governments into soft-pedalling reform efforts while the central bank stuffs its balance sheet with “Schrottpapier” — toxic assets, that risk exploding and compromising its independence in the future.

Other ECB policy makers are loath to risk another traumatic clash with the eurozone’s biggest economy and central power, meaning Mr Draghi will need all his diplomatic skills to broker a deal with Mr Weidmann.

The ECB has seen enough trauma. Mr Stark, its former chief economist, followed Mr Weber and resigned last year in protest at the bond-buying programme, which included Greek bonds that now pose a “toxic” threat, and the broader drift of ECB policy.

Their departure fuelled German public suspicion of the ECB, fanned by a posse of conservative academics led by Hans-Werner Sinn, head of the renowned Ifo research institute, who recently published an open letter denouncing plans to make the central bank the supreme banking supervisor for the eurozone.

The professors warned that a proposed eurozone banking union would land Germany with collective liability for the debts of banks throughout the euro system.

This incessant criticism of the ECB makes it all the harder for Mr Weidmann to retain German public support for the central bank. He must reconcile the Bundesbank’s narrow, orthodox tradition with the demands of the eurozone crisis.

As one senior eurozone official put it: “If Weidmann can drag the Bundesbank into the eurozone era during his presidency, he will have done well.”

A former senior economics adviser to Chancellor Angela Merkel, Mr Weidmann heads a once-mighty institution that still employs nearly 10,000 people — far more than the relatively paltry 1,600 at the ECB — and which is struggling to adapt to life as an affiliate and biggest shareholder in the ECB.

Many of the men who ran the Bundesbank as long ago as the 1980s are still active and act like a Greek chorus, warning that the current course will end in disaster. Reuters