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Stark’s departure: an historic step for German central banking

Stark’s departure: an historic step for German central banking

by David Marsh

Mon 12 Sep 2011

For nearly a century, German central banking history has been studded with spectacular personnel departures, often with fateful consequences that cross the barrier between money and politics. Sometimes, in a country where the intertwining influence of central banking and government has been a deeply serious business for many years, the consequences are a matter of war and peace. Set against this background, Friday’s announcement of Jürgen Stark’s resignation from the European Central Bank is one more milestone in a long and dramatic line of central banking dismissals, deaths, reversals and retreats in Europe’s most important economy.

Uncannily, the ebb and flow of German central bankers mirrors the political vicissitudes of an extraordinary century. Stark’s decision seems to usher in a new period of uncertainty for European money where the euro system in force for 12-1/2 years changes shape vividly in the not-too-distant future, with the splitting off of either creditor or debtor countries.

The roll call of history extends from Rudolf von Havenstein, the hapless Reichsbank president who died in 1923 in the middle of a row with the government over First World War reparations that led indirectly – via the bank’s printing presses – to that year’s astronomical inflation. The events include Karl Otto Pohl’s quitting in 1991 just months after German reunification, the result of discord over Chancellor Helmut Kohl’s refusal to cut German spending. And the string of episodes takes in, too, the two resignations of ‘Hitler's Magician’ Hjalmar Schacht in 1930 and 1939, both at epochal moments in German history as the one-time promise of the Weimar Republic descended into the nightmare of the Third Reich and the Second World War.

At a hugely sensitive time when the crisis in Economic and Monetary Union (EMU) risks getting decisively worse on several fronts, Stark’s departure marks a watershed whose implications extend far beyond Germany’s borders. The self-professed ‘hawk’ on the six-member ECB board symbolises more than anyone else the original conception of EMU build around Germany’s stability-minded principles under the disciplined hand of the Bundesbank, where Stark was deputy president until he moved to the ECB as chief economist in 2006. Unless a miracle happens, the old Bundesbank-style currency union seems to be coming to an end. And a new era of uncertainty and unpredictability beckons.

As the representative of the largest and strongest European economy, as well as its major creditor, Stark has been de facto No. 2 on the board behind president Jean-Claude Trichet. Stark’s decision to leave now rather than serving out the remaining three years of his eight year mandate indicates that Germany and Europe are now entering new terrain in monetary policy.

There are many reasons why Stark’s departure is of unusual significance.

Stark is a civil servant from the epicentre of Germany and Europe. Not only does he embody the Bundesbank’s stability tradition better than anyone else still active in public life, he also represents important political and administrative continuity. From all points of view, Stark’s decision is still more important than Axel Weber’s resignation six months ago. The Bundesbank president since 2004 stepped down at end-April as a result of disagreement with the Berlin government and with President Trichet about ECB purchases of government bonds of weaker euro countries.

Consequently, Weber gave up the chance of taking over from Trichet as ECB President when the latter steps down on 31 October.

Far more than Weber, who always said he was primarily an academic and not a central banker (and who next year begins a new career as UBS chairman) Stark has been ‘a man for all seasons’ on several occasions for the German government under different constellations.

Stark does not seem likely to keep quiet once he leaves office. He will be interested in putting the record straight over the reasons for quitting. Perhaps after a grace period, speaking first in professional circles, later more publicly, Stark may wish to reveal what ‘personal reasons’ led him to this highly unusual step. A man of Stark’s format and sense of history must have written a formal resignation letter to Trichet. This document should certainly be published.

To date, as ECB board member, Stark has shown remarkable loyalty. But ever since the dispute over government bond purchases started in May 2010, this has been a thorn in the ECB’s side that now threatens to turn gangrenous. The discord has intensified with the expansion of bond purchases for Greece, Ireland and Portugal to Italy and Spain. Trichet, ECB president since 2003, has been growing conspicuously more edgy over criticism especially from Germany.

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