Marsh on Monday
Weber, Merkel quarrel over helping PIIGS
By David Marsh
Published: Apr 4, 2011 12:01 a.m. ET
Commentary: Chancellor rips Bundesbank for lack of 'solidarity'
DavidMarsh
European markets columnist
BERLIN (MarketWatch) — It's never a good idea if a major difference of opinion between the government and the central bank emerges into the public eye. But that is what is happening in Germany, as the result of a critical behind-the-scenes tussle between Chancellor Angela Merkel and Axel Weber, the querulous and soon-to-depart president of the famously independent Bundesbank.
Last week was a tough time for Merkel, framed by the massive setback for her Christian Democrat party, which lost control of the key state of Baden-Württemberg for the first time for 60 years in the March 27 regional elections. She made it worse last Thursday by launching an unmistakable broadside at Weber in a landmark speech at a high-profile banking conference in Berlin.
In an otherwise unremarkable address at the conference, organized by the Federation of German Banks and attended by Weber and many key figures from German politics and economics, Merkel veered off-piste by indirectly accusing the Bundesbank chief of a lack of "solidarity" with other European states over the future of Economic and Monetary Union.
Although she did not mention Weber by name, the object of her remarks was clear, especially since only a few hours previously he had told the same audience packed into the rebuilt 19th century central Berlin concert hall of his deep-seated opposition to purchases of troubled countries' government bonds by the European Central Bank.
The dispute between the government and the Bundesbank over the government bond program, decided in May last year and continuing still, was a major reason for Weber's decision, made public in February, to leave his Bundesbank job on April 30 — a year before the expiration of his eight-year mandate — and not to stand for the post of ECB president that becomes vacant at the end of October.
Merkel said that the Bundesbank in past years had shown solidarity with other European countries, for example by buying currencies such as the French franc and Italian lira on the foreign exchange markets . This seemed to be a reference to intervention purchases during bouts of turbulence in the European Monetary System, which was the forerunner to EMU.
These interventions were mainly made by the central banks of the countries concerned using D-Marks borrowed from the Bundesbank under strictly policed short-term swap lines that would normally have to be repaid within three months at most. This was a process subject to typical Bundesbank-style discipline and a very different quality of assistance compared with the open-ended government bond purchases by the ECB, which Weber publicly described as a risk to stability immediately after the policy was decided by the ECB Council in the early hours of the morning on May 10 last year.
In his remarks at the conference, Weber went further than before in explaining his opposition to the move."Solidarity," he said, was a term used for assistance "requested by countries which have infringed the rules [of EMU] from those which have applied them." Weber pointed out that the Bundesbank had signed up without great enthusiasm for EMU in 1998 when it termed the framework decided for the European single currency as "defensible."
Without naming Portugal, Ireland, Italy, Greece or Spain (the so-called PIIGS), he said individual countries now appeared to be departing from "fundamental principles" governing EMU. Rather than requesting assistance that would create "false incentives," they needed to take responsibility for their own plight and to get back to the core concepts behind monetary union of running sound fiscal and economic policies designed to maintain competitiveness
Weber said he was not unduly worried about the widening of credit spreads on government bonds in EMU, arguing that this was a return to norms that had existed around 1995. What was far more worrying, he said, was the contraction of yields in 2000-06, which had seen Greek and German spreads fall to only about 10 basis points — an unjustified degree of harmonization, which, he said, had laid bare diverging economic trends.
Weber, the head of the German central bank since 2004, when his predecessor Ernst Welteke resigned over a murky scandal regarding an overlong stay paid by the Bundesbank in a German luxury hotel, will be replaced by Jens Weidmann, who has been Merkel's economic adviser since 2006. He is the first German government official to make a direct transition to the No. 1 Bundesbank post.
At least at the beginning of his tenure, Weidmann is expected to keep his head down and avoid any confrontation with his old boss. Merkel, beset by problems on many fronts, is no doubt looking forward to a break with Bundesbank skirmishing.
David Marsh is managing director of the Official Monetary and Financial Institutions Forum.