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Analysis
Weidmann shaping up for ECB position

Weidmann shaping up for ECB position

Controversy ahead – but Bundesbank man could bind in Germany 

by David Marsh

Wed 6 Aug 2014

Jens Weidmann, president of the German Bundesbank, appears to be shaping up well as the potential next head of the European Central Bank (ECB), possibly well before the eight-year term of Mario Draghi, the incumbent, expires at end-October 2019.

In contrast to his predecessor, Axel Weber, who in 2011 rejected the possibility of taking the ECB helm because of what he believed would be impossible conditions for success, Weidmann has hard-to-beat credentials. His appointment at the centre of the 18-member economic and monetary union (EMU) would be deeply controversial. However, rather than splitting EMU members between tougher and less tough adherents to Bundesbank-style orthodoxy, as he is often alleged to do, Weidmann could be the man to bind Germany once and for all into the single currency system.

Some non-Germans would interpret his promotion as a sign that control over the euro area was finally moving to Berlin – anathema to many traditional believers in European unity. Many eurosceptical Germans, on the other hand, would see co-opting Weidmann into the ECB role as weakening German resistance to a Franco-Italian campaign to shift EMU policies away from stability, marking the Bundesbank’s final capitulation.

Just as there is uncertainty about precisely what the move would mean, whether or not Weidmann gets the top job is mired in doubt. The appointment of the ECB’s first three presidents, Wim Duisenberg, former president of the Dutch central bank, Jean-Claude Trichet, former head of the Banque de France, then Draghi from the Banca d’Italia, was dogged by political infighting. Weidmann’s ascent would be no different.

What happens depends on circumstances beyond anyone’s control, ranging from Italian political vicissitudes to whether a two-year EMU economic truce holds. One crucial factor is that Giorgio Napolitano, Italian president since 2006, who reluctantly agreed to stay on when his seven-year term expired in April 2013, is believed to wish to stand down around the time of his 90th birthday on 29 June 2015. Draghi is clear favourite to succeed him.

Whether or not a transition in the pivotal function of Italy’s head of state should take place before or after the inevitable next crisis in Italian politics is a moot point. At present, Matteo Renzi, the 39-year-old prime minister, is benefiting from a better-than-expected showing in the May European elections. Yet his reform programme is already showing signs of running into political opposition. Difficulties are bound to grow from autumn onwards if he achieves no quick breakthrough in alleviating Italy’s 20 years of political and economic stagnation.

Similarly, Draghi is credited with presiding over a return of EMU confidence with his so far unrequited pledge in July 2012 to print money to save the euro. The ECB’s unused Outright Monetary Transactions (OMT) scheme has ushered in a long decline in borrowing costs among hard-hit peripheral countries, also reflecting an at first welcome, now worrying decline, in euro area inflation. However, cheaper government financing has acted as a disincentive to thoroughgoing economic reform that has prolonged the euro area’s low growth. The ECB now faces the hazard of engineering a further period of cheap money at a time when US rates are about to rise.

As German Chancellor Angela Merkel’s former chief economic adviser, Weidmann straddles politics and central banking. But he has made clear his primary allegiance is to the Bundesbank’s hard money principles. If he became ECB leader, Weidmann would show politicians that the bank’s sway is not unlimited. He believes that the key to solving EMU’s abiding contradictions and conundrums lies with governments, not with central bankers.

Possessing (a Bundesbank first) a self-deprecating sense of humour, Weidmann (in contrast to Weber, now chairman of Swiss bank UBS) has a penchant for soft-speaking diplomacy that would stand him in good stead. Weidmann speaks French. He can convey unpleasant news in a manner that the French may regard as both convincing and conciliatory. In his three years as Bundesbank chief, Weidmann has built up alliances on the ECB governing council based on knowledge that, with Germany heavily outgunned on the decision-making body, he cannot display permanent opposition to ECB policies. He has to pick decisive battles he knows he can win.

The long-running skirmishing over the OMT illustrates Weidmann’s style. Although he made clear his opposition to the programme when it was first aired, Weidmann has publicly not excluded an ECB-style version of quantitative easing (QE), under which the ECB would buy government bonds under certain conditions. In practice, any form of widespread QE does appear extremely unlikely. Weidmann’s ECB accession would probably rule it out altogether. 

Weidmann knows that EMU can prosper only if Germany has higher inflation than struggling euro states. In recent weeks, he has publicly championed 3% German wage growth. Although this appears a departure from tradition, in reality Weidmann is doing little more than backing the Bundesbank’s traditional line that wages should rise in line with underlying inflation (the ECB’s targeted 2%) and productivity growth of 1%. 

On existential EMU issues, Weidmann is a realist. Political and fiscal union as desired by EMU purists is impossible, he says, so euro states will have to stick to rules on economic discipline or else face the danger of departure. He states that burden-sharing among stronger and weaker states is possible only if the euro area exerts some form of democratically-accountable control over other members’ budgetary and economic policies. Although still likely to raise hostility in France, the mantra of shared ‘liability and control’ is now a centrepiece of EMU decision-making.

Weidmann believes present EMU arrangements overstretch the German constitution. He has backed a possible German referendum to decide how far the Germans wish to go in European integration. If he accedes to the top role, such politically sensitive questions will no longer be taboo. 

A German running the ECB would be unpalatable for some, especially given the unpredictable state of politics in France and other key EU states. Yet Weidmann’s accession would guarantee Germany’s commitment to clarifying longer-term issues crucial to EMU’s success and survival. The corollary is somewhat chilling. Without one of its own nationals in this pivotal position, that commitment may appear increasingly in doubt.

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