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Picking a fight with the Bundesbank can be dangerous for ECB health

Picking a fight with the Bundesbank can be dangerous for ECB health

by David Marsh

Mon 8 Aug 2011

To paraphrase Oscar Wilde: to pick a fight with one Bundesbank president might appear a misfortune, to take on two of them looks like carelessness. With just three months of his remaining tenure at the European Central Bank ahead of him, president Jean-Claude Trichet is now facing a second tussle of authority with the most powerful central bank among his shareholders. Last night’s statement from the European Central Bank about activating its ‘securities market programme’ – which was somewhat half-hearted about any commitment to purchasing Italian and Spanish bonds – is unlikely to dispel doubts about ECB unity.

Axel Weber, president of the statutorily-independent German Bundesbank until end-April, embarked on a confrontation with Trichet last year in initially behind-the-scenes discord over the ECB’s bond-buying programme that started in May 2010. Weber’s successor Jens Weidmann, who replaced him at the beginning of May, quickly confirmed the divide by railing against the bank’s resurrected bond purchases announced at the ECB’s press conference on 4 August. The Bundesbank-ECB spat is the most serious ECB split since the bank was set up 13 years ago. Even though Europe is crying out for leadership, the discord will complicate the parliamentary approval process of the multi-billon-euro package decided by European leaders on 21 July to make the EFSF euro rescue fund more effective – and therefore seem likely gravely to intensity further the euro’s existential struggle.

Within hours of the ECB’s 4 August announcement that it was restarting purchases of peripheral bonds, Weidmann made his views known through his press department’s statements to news agencies. As the former economic adviser to Chancellor Angela Merkel, Weidmann knows the political scene in Berlin pretty well. Although his anti-bond purchase sentiments have been interpreted as a hostile shot at his former boss, in fact the opposite is true. Weidmann of course wants to portray himself as an independent voice, but he can be relied upon to articulate rather closely what the German chancellor herself feels about key economic issues. Weidmann’s public statement on 22 July declaring that the moves the previous day brought closer the ‘collectivisation’ of European Community debt can be interpreted as favourable to Merkel by showing foreign politicians that, in trying to win concessions from Germany, they have only a highly limited margin of manoeuvre.

Last year – although Weber certainly had allies on the ECB council – the former Bundesbank’s action in stating opposition to the 10 May purchases was an act of an outlier, a loner who later earned the disapproval of many of his council colleagues for speaking out of turn. Fifteen months later Weidmann is believed to have been supported by three other council members, including his German colleague on the ECB board Jürgen Stark as well as the Dutch central bank chief Klaas Knot and Luxembourg governor Yves Mersch.

The divergences were on display in last night’s statement. Unlike the ECB announcement on its securities market programme on 10 May 2010 - headlined ‘ECB decides on measures to address severe tensions in financial markets’ – last night’s announcement was billed as a ‘statement by the president of the ECB’, rather than by the ECB itself. Although the syntax of the statement showed that it was formulated by Jean-Claude Trichet, the formulation followed the Bundesbank line. The bond-purchase issue was No. 6 in a six-point list of messages. Hardly a ringing endorsement. Watch out for more fireworks.

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