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Turning weakness into strength

Turning weakness into strength

ECB likely to remain vague on Thursday
Welter of support for Weidmann in Germany

by David Marsh

Tue 4 Sep 2012

Attack: the best form of defence. Bundesbank president Jens Weidmann seems to be offering a masterclass on how to turn a weak position into a strong one.

The German press in the last few days has been full of reports that Weidmann has threatened to resign and had to be talked out of it by Wolfgang Schäuble, the finance minister.

It is highly unlikely that Weidmann will actually leave. The reports have fostered, as was no doubt planned, a welter of pro-Weidmann support from German politicians. Over the vexed issue of a potential restarting of the European Central Bank’s programme of purchasing weaker countries’ state bonds, Weidmann has been for several months in a minority on the ECB’s decision-making council. But his position has strengthened ahead of the council’s next meeting on 6 September when, far from announcing grandiose bond market support, the ECB is expected to remain rather vague on its plans.

Largely technical measures in the field of ‘non-standard’ policy instruments – combined with a possible small interest rate cut in line with the euro area’s weakening economy – look likely to occupy the headlines, rather than a far-reaching, ‘do whatever it takes’ bond purchase programme.

The ECB has made clear that no bonds will be bought unless troubled governments — above all Spain — make a formal application for aid from the European rescue funds EFSF and ESM. The ECB is quite happy to sit out the stand-off until Madrid moves. Another reason why we can’t expect much on Thursday is because the ECB and everyone else are waiting for the German Constitutional Court on 12 September to rule on the legality of the ESM — the permanent European Stability Mechanism, which critics in Germany could badly weaken parliament’s control over budgetary financing. The court may call for safeguards to satisfy democratic legitimacy, which could include a hint of a possible referendum in Germany, a point Weidmann has himself made in previous months.

Such an outcome would upset financial markets’ calculations for a speedy end to the imbroglio over economic and monetary union. At a closed-doors European parliament hearing on Monday, Draghi seems to have added nothing new to his already-stated remarks about possible bond purchases, repeating the danger of fragmentation of the euro area’s financial markets and the risk that banks are ‘renationalising’ their business operations.

In a radio interview Schäuble on Monday declined to give state bond purchases full backing, saying that any actions amounting to monetary financing would ‘break a taboo’ and would be unacceptable.

Whoever is spreading the view that Weidmann may be thinking of a new job is certainly keen for him to stay in it, and has increased the likelihood that he will. Leading members of Chancellor Angela Merkel’s Christian Democratic Union and the opposition Social Democratic Party allied to Weidmann’s defence over the weekend. Carsten Schneider, the SPD’s budgetary spokesman in Parliament, blamed the government for not giving Weidmann sufficient support, said his resignation would be a ‘disaster for Merkel’ and warned the ECB against bond purchases, terming this as ‘undemocratic, since the Bundestag has not been consulted.’

What is novel about the ‘Weidmann may quit’ reports is not that he has been speaking about resignation but that the issue has been aired in the press.

Three of Weidmann’s predecessors have stood down early as a result of various episodes connected to the government. The two most recent Bundesbank’s departures — Axel Weber, Weidmann’s immediate predecessor, in February 2011, and Jürgen Stark, ECB board member for economics and a former deputy Bundesbank president, in September 2011 — were announced as almost complete surprises. Although the two men had toyed with resignation for months, they had not told too many people about it.

The Bundesbank’s less-than-smooth personnel history has alerted the German media to potential for discord with the government. The Bundesbank’s press team appears to have done the rest. Weidmann’s strategy of appealing to a broad variety of Germans over the heads of the ECB council seems to be paying off. The chances that the Bundesbank president will become the first one to serve his full term since Hans Tietmeyer stepped down in 1999 have probably risen over the past week.

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