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When Mario Draghi took the helm of the European Central Bank nine months ago, he took care not to alienate Bundesbank President Jens Weidmann. Now the gloves are coming off.
Draghi yesterday announced the ECB is working on a plan to re-enter bond markets and took the unusual step of naming Weidmann as the only policy maker to object to the proposal. While the move would ratchet up the ECB’s response to Europe’s debt crisis, it risks isolating the German central bank, potentially undermining the effectiveness of the new measures.
“That’s why investors are disappointed,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. “The ECB can’t just take random measures against the Bundesbank’s will. The country with the largest economy needs to be part of any package.”
The euro dropped yesterday, with the standoff between Draghi and Weidmann adding to uncertainty around the latest effort to tame a debt crisis that’s threatening the survival of the single currency. Weidmann must now decide whether to acquiesce to a new bond program or dig his heels in. Two German policy makers have already quit the ECB’s Governing Council over bond buying.
Draghi said new purchases in the secondary market would only complement buying by Europe’s rescue fund in the primary market, to which strict conditionality is attached. ECB officials are working on the plan and details will be fleshed out in coming weeks.
While Draghi’s comments suggest Weidmann has lost the support of traditional allies on the council such as the Netherlands, Luxembourg and Finland, the Bundesbank president may have German public opinion behind him.
The country’s mass-selling Bild tabloid yesterday protested the bond-purchase plan, saying “no more German money for bankrupt states, Herr Draghi!” and threatening to take back the Prussian helmet it gave him to remind him of German virtues.
While Weidmann only has one vote on the ECB’s 23-member council, “the Bundesbank veto matters a lot in this,” said Julian Callow, chief European economist at Barclays Plc in London. “We need to know exactly how the Bundesbank is appraising things.”
A Bundesbank spokesman declined to comment on Weidmann’s position yesterday. Last week the bank reiterated its opposition to ECB bond purchases after Draghi flagged the initiative in a speech in London.
“We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem,” Weidmann said in an interview published by the Bundesbank on Aug. 1. The ECB’s independence “requires it to respect and not overstep its own mandate,” he said.
German ECB officials have been the most vocal opponents to the bank’s bond purchases, saying they blur the line between monetary and fiscal policy and relieve pressure on governments to enact reforms. Weidmann’s predecessor Axel Weber and ECB Chief Economist Juergen Stark both resigned last year over the original program, which was launched in May 2010 and shelved in March this year.
“It’s known that Mr. Weidmann and the Bundesbank have their reservations about programs that buy bonds,” Draghi told reporters, breaching the convention of not revealing how individual policy makers vote. The ECB doesn’t publish minutes of its meetings to protect council members from political interference.
“Weidmann was unhappy before but he’s probably even more unhappy now after being name-checked like that by Draghi,” said Jacques Cailloux, chief European economist at Nomura International Plc in London. “The Bundesbank has to live with being outvoted, but it remains to be seen whether it really goes to the wire, blocks the program and refuses to buy the bonds.”
Under the previous program, national central banks in the euro area bought bonds on behalf of the ECB, with the Bundesbank as the largest shareholder making the lion’s share of the purchases.
The Bundesbank may still have brought its influence to bear by delaying a formal decision before ECB working groups have designed a concrete plan, said Erik Nielsen, chief economist at UniCredit Bank AG in London.
“This smacks of a compromise forced by the Bundesbank,” he said. “It buys time. The risk is that the ECB has now backed itself into a corner, whereby the committees can’t really agree on what’s needed.”
At his first press conference as ECB president on Nov. 3, Draghi was asked how he viewed the monetary policy principles of the Bundesbank in view of some suggestions in Germany that his predecessor, Jean-Claude Trichet, had diverged from them. Draghi stressed his “great admiration for the tradition of the Bundesbank.”
“As for the future, let me do my work and we will have periodic checks as to whether I am in sync with this tradition or deviating from it,” he said.
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