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Greece and Bundesbank: an intriguing combination

Greece and Bundesbank: an intriguing combination

by David Marsh

Mon 9 May 2011

As speculation swirls that Greece – the eighth largest economy in the 17-nation euro area – may be about to restructure debt or even countenance leaving monetary union, some intriguing changes are under way at the helm of Germany’s independent Bundesbank.

Jens Weidmann, the new Bundesbank president, who took over on 1 May from Axel Weber, looks set to preside over an effective reestablishment of the German central bank’s traditional dominant role on the European monetary scene. The ructions over Greece’s 10 year flirtation with EMU marks an appropriate opportunity for the Bundesbank to move back to mid-stage.

Though a youthful 43, Weidmann is a figure of considerable continuity. He spent the last five years in Berlin advising Chancellor Angela Merkel on economic policy, but before that was for three years at the Bundesbank. Bespectacled and decisively bland-looking, Weidmann is cast in the mould of Helmut Schlesinger, the former Bundesbank president, now 86, who was at the centre of successive foreign exchange crises that nearly ended EMU’s forerunner, the European exchange rate mechanism, in 1992-93.

In a short but well-crafted speech in the presence of many German financial heavyweights (including Schlesinger and his predecessor Karl Otto Pöhl, aged 81), Weidmann at his inauguration ceremony on 2 May stressed powerful continuity with the Bundesbank’s traditions. His insistence on “stability” - he mentioned it no less than 20 times, more than twice as often as Weber in his first Bundesbank speech in 2004 - made a strong impression.

Equally striking was the pledge to brook ‘no compromises’ in monetary stability as well as his wish for a ‘correction back to monetary policy normality’ – implying both increases in interest rates and an early exit from the European Central Bank’s liquidity measures to help banks governments. Pointedly, Jean-Claude Trichet, the ECB president, said on Thursday in Helsinki that normalising the bank’s interest rates was not a term he ever used.

Weidmann’s inaugural address was notable, too, for its warmth towards his predecessor and mentor, Weber, under whom he studied at Bonn University. This was the first Bundesbank handover where the new recruit self-confidently, repeatedly and publicly addressed his predecessor with the familiar Du form.

Weber fell out with Merkel over his opposition to ECB purchases of peripheral state bonds that started a year ago – a policy that has comprehensively failed. Weidmann signaled enthusiastic agreement with Weber, calling for ‘full separation’ between monetary and fiscal policy. The message was clear: if the ECB wishes to resume purchases of Greek, Irish and Portuguese bonds, it will be more or less over Weidmann’s dead body.

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