STEERING A COURSE THROUGH THE EUROZONE´S SQUALLS / THE FINANCIAL TIMES COMMENTARY & ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Steering a course through the eurozone’s squalls

By David Marsh

Published: May 1 2011 19:30

The changing of the guard at the Bundesbank is an event of practical significance as well as ritual solemnity. The German central bank has ceded to the European Central Bank its former role at the fulcrum of European money, yet its head is the most important person after the ECB president on the bank’s 23-member decision-making council. Jens Weidmann, Chancellor Angela Merkel’s economic adviser since 2006, has taken over from Axel Weber as Bundesbank president, marked by a ceremony on Monday at its Frankfurt headquarters which Wolfgang Schäuble, German finance minister, and Jean-Claude Trichet, ECB chief, are scheduled to attend.


The transfer of authority takes place at a sensitive time. Mario Draghi, the Banca d’Italia’s seasoned governor, will almost certainly take the top ECB job when Mr Trichet retires at the end of October. Ms Merkel, who coveted the position for Mr Weber and still smarts from his rejection of the post three months ago, has still not officially given her blessing to Mr Draghi’s nomination.


Still more important, economic and monetary union, the most ambitious international currency project since the fixed-rate Bretton Woods system was established 65 years ago, is at a turning point. The 17-nation monetary construction dominated by Germany and France looks likely either to become a “transfer union” in which creditor nations permanently support debtor states, or to split into segments of richer and poorer countries. Either course would bring intractable problems – and Germany, as Europe’s pivotal but strangely reluctant power, will play a key role in deciding which way EMU goes. So today’s speeches by Messrs Schäuble, Trichet, Weber and Weidmann will be followed with rapt attention.


Up to the late 1990s Bundesbank presidential inductions were still grander, carried out in the presence of the German chancellor in the palm-fringed setting of Frankfurt’s 19th century botanic gardens. There are several reasons why Ms Merkel is not on show now. In view of the Bundesbank’s fiercely independent reputation, she has no wish to broadcast her closeness to the new president, the first German government official to move directly to the top Bundesbank post. By contrast, Mr Weber decided to quit a year before his mandate expired and to withdraw from the ECB race partly because he felt Ms Merkel was not backing his tough line opposing the ECB’s purchases of peripheral eurozone countries’ bonds. Ms Merkel publicly signalled the rift in March by rebuking Mr Weber for lack of European “solidarity” at a banking congress in Berlin that both attended. Mr Weber claims he was right all along – underlining the ominous widening of peripheral countries’ bond yield gap with Germany from the already elevated crisis levels of early May 2010. (Over the past 12 months the “spread” has roughly doubled for Greece and Portugal to 12.5 and 6.9 percentage points, tripled for Ireland to 7.5 points and risen 50 per cent for Spain and Italy to 2 and 1.5 points.)


Mr Weber is leaving, aged 54, to teach at Chicago University and may later take up a commercial post. At 43, his successor Mr Weidmann is the youngest-ever Bundesbank chief – and the first to speak fluent French. Relations between the Bundesbank and French leaders have been notoriously bad, but Mr Weidmann’s closeness to Ms Merkel and experience of Franco-German troubleshooting should help him charm the French where his predecessors vexed them.


Judging by past patterns, Mr Weidmann faces a baptism of fire. Changes at the Bundesbank helm have often heralded currency disorder. When Karl Blessing, the first Bundesbank president, gave way in 1969 to Karl Klasen, massive speculative capital inflows followed, leading to the floating of the D-Mark in 1971. When Karl Otto Pöhl took the helm in 1980, the former adviser to Chancellor Helmut Schmidt faced huge outflows from the D-Mark, resulting in emergency interest rate increases and Mr Schmidt’s ejection in 1982. These skirmishes pale by comparison with the unrest after Mr Pöhl resigned in May 1991 – for similar reasons to those behind Mr Weber’s departure. Mr Pöhl believed Chancellor Helmut Kohl had let him down over the conditions for German currency union in the run-up to unification. Mr Pöhl realised that, with Mr Kohl’s mistakes fuelling inflation, conditions were getting rougher. This judgment proved correct when serious monetary squalls erupted in autumn 1992, causing Britain and Italy to leave the European exchange rate mechanism and many other countries to devalue.


Mr Weber has felt increasingly isolated on the ECB’s council – just as Mr Pöhl quarrelled with the Bundesbank council 20 years ago. Both men saw their Bundesbank jobs affecting their young families. Both became drawn to more lucrative and enjoyable careers outside central banking. Mr Pöhl switched to the Oppenheim banking group, while Mr Weber’s post-Chicago future is a matter of conjecture.


Mr Pöhl and Mr Weber will be remembered for defending the Bundesbank’s independence when political circumstances required compliance. The Bundesbank has traditionally stood for steadfastness, stubbornness and stability. Mr Weidmann will need all this, and more, to cope with coming upheavals.

David Marsh is co-chairman of the think-tank OMFIF and author of The Euro – The Battle for the New Global Currency, to be published in July


Copyright The Financial Times Limited 2011.