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Analysis
Weidmann dons hawkish plumage

Weidmann dons hawkish plumage

by David Marsh

Tue 3 May 2011

The changing of the guard at the Bundesbank is an event of practical significance as well as ritualistic solemnity. The German central bank has ceded to the European Central Bank its former role at the fulcrum of European money, yet its new head Jens Weidmann is the most important person after ECB president Jean-Claude Trichet on the bank’s 23-member decision-making council.

Weidmann, who bears a striking physical resemblance to a younger Helmut Schlesinger, the former Bundesbank president, took over on 1 May from Axel Weber after previously serving five years as Chancellor Angela Merkel’s economic adviser. The transition was marked by a ceremony yesterday at the Bundesbank’s Frankfurt headquarters attended by Wolfgang Schäuble, German finance minister, as well as Trichet, who retires at the end of October and is near-certain to be replaced by Mario Draghi, governor of the Banca d’Italia.

Weidmann did not disappoint the assembled bevy of past and present Bundesbank functionaries by stressing he would don the German central bank’s traditionally hawkish plumage. Schäuble marked the importance of the occasion by saying that, with the future of the euro now partly in the Bundesbank’s hands, ‘the foundations of our liberal democratic system are at stake.’ Trichet restricted himself to saying that the ECB in its 13 years of existence had stuck to its mandate of producing inflation of slightly less than 2% throughout the euro area – conscious that current price rises above that level make further interest rate increases certain in coming months.

Trichet underlined how much he had agreed with Weber on issues of emergency liquidity for the European banking system via purchases of asset-backed covered bonds in recent years. He politely drew a veil over disagreements over the past 12 months on ECB purchases of sovereign debt from the euro periphery - a development that has left the ECB nursing heavy losses.

This discord was the main reason why Weber announced in February he was quitting his Bundesbank job a year before his mandate expired and withdrawing from the race to succeed Trichet. Ms Merkel coveted the ECB position for Germany, is still smarting from Weber’s rejection of the post, and has still not officially given her blessing to Draghi’s nomination.

Up to the late 1990s Bundesbank presidential inductions were still grander, carried out in the presence of the German Chancellor in the palm-fringed setting of Frankfurt’s 19th century botanic gardens. In view of the Bundesbank’s fiercely independent reputation, Merkel yesterday had no wish to broadcast her closeness to the new president, the first German government official to move directly to the No. 1 Bundesbank post. She publicly signalled the rift with Weber in March by rebuking him for lack of European ‘solidarity’ at a banking congress in Berlin.

Weber claims he was right all along – underlining the ominous widening of peripheral countries’ bond yield gap with Germany from the already elevated crisis levels of early May 2010. It looks almost certain that the ECB has now stopped its purchases of peripheral sovereign bonds, underlined by the latest five week pause in transactions

Weidmann’s close connections with Merkel have raised conjecture that he could be a pushover for political interests. However the Bundesbank’s collective spirit – and the fact that he worked there for three years before moving to Merkel’s side – will prove a determining factor. Weidmann’s sinews were stiffened yesterday by Franz-Christoph Zeitler, the Bundesbank’s deputy president, who pointed out the celebrated ‘Becket effect’ under which Thomas Becket, Henry II’s 12th century chancellor, took a radically different line from the English King once he was appointed Archbishop of Canterbury. Leaving diplomatically unspoken that the Becket affair ended with the Archbishop’s murder at the King’s behest, Zeitler declared that he did not wish to take historical parallels too far. But he added that Becket received the ultimate acclamation that no Bundesbank president has yet experienced: canonisation.

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