11/15/2011 03:14 PM
Saving the Euro
Germany's Central Bank against the World
Jens Weidmann, the new president of Germany's Bundesbank, is strongly opposed to making the European Central Bank the lender of last resort in efforts to prop up the common currency. It's a lonely fight, however, and the pressure from Germany's European partners is intense. Some warn that Weidmann's course could end up destroying the euro. By SPIEGEL Staff.
An unsuspecting observer witnessing last Wednesday's meeting in room E 400 of the Paul Löbe House, a parliamentary building in Berlin, could have been mistaken for thinking it was the defense of a PhD thesis. The candidate, wearing a dark suit, sat down politely at a separate table, his youthful-looking face revealing a mixture of shyness and confidence. He folded his hands and placed them on the table in front of him, waiting patiently until someone addressed him. Sitting across from him, the members of the Finance Committee of the German parliament, the Bundestag, could easily have been a board of university examiners.
But the man being questioned was none other than Jens Weidmann, the 43-year-old president of Germany's central bank, the Bundesbank, and it didn't take long for his audience to realize that he should not be underestimated. Speaking in a quiet but firm voice, Weidmann delivered his assessment of the bailout policy of the euro-zone countries and the European Central Bank (ECB). In the end, it was Weidmann who was handing out the grades -- and they weren't good ones.
Politicians still hadn't done their homework, the Bundesbank president said critically. He assigned the blame for the crisis of confidence in the euro zone to politicians and said that they were jeopardizing the central bank's independent position. And then came the statement without which no German monetary watchdog can complete an appearance. The ECB, Weidmann said, has only one purpose, namely "to keep prices stable."
Growing Pressure
One man is bracing himself against the storm. In the battle to save the euro, Europe's monetary watchdogs are under growing pressure from around the world to buy up unlimited quantities of the sovereign bonds of ailing member states. But the head of the Bundesbank is saying no, and he is making his message loud and clear, not only in Berlin, but also in Brussels, Paris and Washington. If the ECB gave in to the pressure, Weidmann argues, it would not only be violating European treaties and the German constitution. Such a move would also be "synonymous with the issuance of euro bonds."
The crisis surrounding the common currency has reached a new stage. Less than two years after the Greek government first admitted that it was in deep financial trouble, Europe's politicians are running out of options to save the euro. They have already put together half a dozen bailout packages and come up with half a trillion euros. The heads of six governments have been toppled or have resigned.
Many of the principles on which the common currency was once based have been violated, ranging from the ban on assuming the debts of other countries to the requirement to keep the euro zone's central bank out of politics.
Breaking the rules has become standard practice, but to no avail. Greece is closer to leaving the euro zone than ever before, and Italy seems to be drifting inexorably toward a national bankruptcy. No wonder that, last week, German Chancellor Angela Merkel once again found herself having to deny the rumor that Germany and France are already preparing for a split in the euro zone.
These are desperate times, so much so that most EU leaders feel that it is time to clear away the last remaining taboo in the euro zone. Until now, the ECB was only buying limited numbers of Portuguese, Spanish and Italian sovereign bonds to prop up the euro.
But if most European politicians have their way, in the future the ECB will vouch for all of the outstanding debt of the debtor nations, permanently, to an unlimited extent and in violation of all applicable laws. Their recipe is to print money and drown the debt crisis in a sea of liquidity.
Risk of Inflation
Weidmann believes that what many politicians see as the easiest solution would only exacerbate the problems. In his view, it would be "sweet poison" for the debtor nations, inconsistent with all of the Bundesbank's traditions and a means of government financing that has triggered a financial catastrophe in Germany once before, in the form of the hyperinflation of the 1920s.
For weeks, Weidmann's resistance has been the dominant topic at all financial summits. In Germany, the central banker knows that he enjoys the support of the majority of the population and most experts.
But the pressure from abroad is growing. From US President Barack Obama to French President Nicolas Sarkozy to European Commission President José Manuel Barroso, all are urging the Germans to abandon their resistance to the ECB plan. The ECB, the London-based Financial Times wrote last week, must finally use its "silver bullet."
The chancellor and Finance Minister Wolfgang Schäuble, constantly under fire from their allies, would be only too happy to send a signal of their willingness to make concessions. As a result, the campaign of Germany's most important monetary watchdog has also turned into a personal struggle to assert his independence. A former adviser to Merkel's administration, Weidmann must now prove himself in the role of opponent to his erstwhile patrons.
Plenty of Space
A few weeks ago, the Bundesbank president was strolling through the headquarters of the International Monetary Fund (IMF) in Washington. The fall meeting of the IMF and the World Bank has just begun, and finance ministers, central bankers and senior government officials were chatting in the hallways. In the past, when he was still working for the administration as a department head in the German Chancellery, Weidmann consistently made a wide berth around the major stages, and was always prepared to react to a wave of the chancellor's hand.
Now, sitting on a large stage next to Finance Minister Schäuble, he took advantage of the opportunity to tease Merkel's most important cabinet member. "Did you deliberately leave so much space between us?" Weidmann asked. The podium was in fact very large, with practically enough space to accommodate a soccer team. "We did it because of your independence," Schäuble replied with a sarcastic smile.
The minister was feeling annoyed. He had just spent hours listening to his French, British and American counterparts pester him to finally agree to the use of the ECB to rescue the euro. But the man next to him was unmoved, as he mechanically recited the traditional mantras of the Bundesbank: "independence," "a culture of stability" and "credibility." The finance minister scrutinized Weidmann with a sullen look on his face.
Applying Lessons Learned in Berlin
Since Weidmann took office six months ago, he has not made the slightest impression that he is dependent on the chancellor and her administration. Only a few weeks after taking the helm at the Bundesbank, he went on the offensive against the euro members' bailout policy and also against the majority in the ECB's Governing Council.
In early August, the Bundesbank president voted against reinstating the ECB's bond purchase program and the plan to buy the sovereign bonds of Italy and Spain, which had come under financial pressure.
But Weidmann was virtually alone in his position, with the overwhelming majority of the ECB council voting in favor of the measure.
It was a bitter defeat, but for Weidmann it was not a reason to abandon his resistance. On the contrary, he applied what he had learned in Berlin politics, and waited for a new opportunity to apply the brakes.
It would happen soon enough. Because the European Financial Stability Facility (EFSF) has only limited funds at its disposal, French President Nicolas Sarkozy sought to use a trick to provide it with access to the ECB's unlimited funds: The Luxembourg-based EFSF was to be converted into a bank.
"Out of the question," Weidmann said testily. The plan would enable the central bank to indirectly provide unlimited sums of money to fund government budgets. The EFSF could deposit the bonds it had purchased as collateral with the ECB and receive fresh money in return, with which it could then buy even more bonds.
Weidmann objected, and this time key colleagues on the ECB Governing Council came to his support. In light of the resistance of German monetary watchdogs, the German government also supported Weidmann. There were certainly other ways to increase the EFSF's financial resources, Finance Minister Schäuble conceded.
Controlling the News Agenda
In his tenure as government adviser, however, Weidmann did not only internalize the art of political timing. He also learned that successes only count when they are appropriately packaged, such as the most recent dispute over the Bundesbank's so-called special drawing rights. These rights consist of billions in receivables that are counted as part of the Bundesbank's reserves and, like gold and foreign currency, can also be monetized.
The idea was that the countries of the monetary union should transfer their special drawing rights to Europe's bailout fund in order to make them available for rescuing the euro. Unanimity on the issue was already largely achieved at the G-20 summit in Cannes. France was in favor, as was the United States, the IMF had no problem with the idea, and even the other national central banks in the euro-zone countries had few objections.
But Weidmann did. First the Bundesbank president submitted his veto to his former boss, who then opposed the initiative. But that still wasn't enough for Weidmann. At the end of the summit, when the plan no longer played a role in Cannes, Weidmann leaked information about the discussions to the press, knowing full well that any attempt to touch the Bundesbank's reserves would cause a major upset.
He wasn't mistaken. A cover story in the heavyweight Frankfurter Allgemeine Sonntagszeitung newspaper was titled "And Now Our Gold." It didn't matter that there had never been any mention of the Bundesbank's bullion. Either way, Weidmann had won the battle, and he had also cleverly made sure that his victory would dominate the news agenda for an entire weekend.
Growing Calls for Intervention
Now the question is how long the cheering will last. Although Weidmann won a battle with his successful handling of the special drawing rights issue, he certainly hasn't won the war. Last week, as it became increasingly clear that the Italian debt crisis was coming to a head, there were growing calls for a massive intervention by the European Central Bank, and they were supported by credible arguments.
In the crisis, the ECB has proven to be the only functioning institution that can make a stand against global speculators and expect to succeed. If it pledged to buy unlimited amounts of sovereign bonds to keep the yields on those bonds low, not even the wealthiest hedge fund would dare to speculate against it.
Keeping the speculators in check is a laudable goal. The only problem, in Weidmann's opinion, is that a victory over speculators would come at too high a price. The central bankers know perfectly well that by purchasing bonds, they are serving policymakers and jeopardizing their real function of keeping prices stable.
When the ECB buys bonds today, it is still taking just as much money out of the market as it is injecting into it. Experts call this "sterilizing." The goal is to ensure that the money supply does not grow excessively, thus reducing the risk of inflation.
However, the process only remains unproblematic as long as the interventions in bond markets are kept within reasonable limits. But now that they are propping up Italy, the central bankers in Frankfurt have had to inject more and more money into the market to achieve any effect at all.
Climbing Yields
Weidmann feels that these interventions are completely unnecessary. Italy, unlike Greece, is not bankrupt, he says. On the contrary, the country is very prosperous and could easily raise money by, for example, increasing taxes.
Last week, it became apparent that the ECB's money hose can achieve little in the long term. The more the political crisis intensified, the more billions the ECB had to spend on Italian sovereign debt, because no one else wanted to invest in the bonds. Banks and other major investors, fearing that they would soon be faced with high losses, as with Greek bonds, threw their Italian bonds on the market.
Traders reported that the ECB bought up bonds worth significantly more than €10 billion ($1.37 billion) last week alone. But yields kept on climbing, despite the interventions, topping 7 percent by the middle of last week. The market for Italian government bonds is simply too big. Only when a political solution to Italy's crisis was in the works did rates fall again.
If the country doesn't get its problems under control, the ECB will have to intervene to the tune of billions. The consequences would be considerable. If monetary watchdogs are unable to reel in liquidity, the money supply will expand and, sooner or later, will lead to rising prices.
One of the biggest fears of critics of the bond-purchase programs is that they will deprive governments of any incentive to sort out their finances on their own. When the ECB decided in August to buy Italian bonds, Berlusconi, trusting in the Frankfurt-based rescuers, cut back his austerity program. As in the case of Greece, valuable time was lost without structural reforms being addressed -- and everything just got worse.
"Here in Europe, we spent a year and a half talking about irrelevant alternatives," says former Bundesbank President Axel Weber, who is currently teaching at the University of Chicago and is in a position to express inconvenient truths. "All previous ideas follow the principle: How can I use other people's money to help myself?"
Deep Holes
Since August, the ECB's bond purchases have doubled to more than €180 billion. This is only a fraction of the amount that the American central bank, the Fed, has spent on treasury bonds since the financial crisis.
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But in the United States, the liability rests with the federal government and not with the individual states. In Europe, by contrast, the Germans always bear 27 percent of the risk, corresponding to their share of the ECB's capital. If the securities were downgraded as a result of a national bankruptcy, German taxpayers would have to cover the losses.
Should the ECB start generally propping up government finances, it would create deep holes in Germany's federal budget. And it would also be a clear violation of the law, since the European treaties expressly bar the ECB from financing the euro-zone countries. If Germany truly wished to allow the central bank to finance governments, constitutional law experts argue, the matter would have to be decided by the German Bundestag. In fact, a referendum might even be necessary.
It's no wonder that Weidmann's campaign is highly popular in Germany. Last week, the five members of the influential German Council of Economic Experts, which advises the government, announced their support for the Bundesbank president. Most members of Germany's banking industry also support the Weidmann line. Deutsche Bank CEO Josef Ackermann, for example, favors imposing tight restrictions on the central bank's mandate. "If we start developing the ECB into a bank that performs completely different tasks beyond maintaining price stability," he says, "we will lose people's confidence."
Michael Heise, chief economist at the insurance giant Allianz, advises "strongly against unlimited purchases of government bonds." If a country is unable to sort out its finances," he says, "we should let the markets speak." And Commerzbank chief economist Jörg Krämer warns against turning over control of the money presses to national governments. "If the virus of mistrust spreads to the ECB, it will have serious consequences," says Krämer. As a result of the bond purchases, he explains, wealth is being permanently transferred from northern to southern Europe, "without democratic legitimization and without the debt problems being solved."
The top officials of the German banking lobby also clearly oppose all plans to make the central bank largely a tool of policymakers. "Then it'll only be a short step from the use of currency reserves to firing up the money presses to pay for government debts," warns Andreas Schmitz, president of the Association of German Banks. "However, the ban on government financing by the ECB is a valuable asset that cannot be compromised."
Weidmann agrees. In his campaign, he can count on the support of the German banking industry, as well as on the Bundesbank's tradition. Its presidents have always considered resisting pressure from politicians to be their most important task.
Strong Independent Streak
Since its birth on July 26, 1957, the actions of the Bundesbank have been shaped by two genes. First, it has a strong independent streak, which it is particularly likely to demonstrate in its dealings with politicians. Second, it can be enormously combative when it is called upon to secure the stability of its own currency.
It is as if the institution had implanted these two core characteristics into its respective leaders, from the first Bundesbank president, Wilhelm Vocke, to the current president, Jens Weidmann.
The position and the responsibility have had a greater influence on the respective Bundesbank presidents than they in turn had on how the institution is run. Bundesbank presidents who were members of the center-left Social Democratic Party (SPD), like Karl Klasen and Karl Otto Pöhl, ran the central bank in much the same way as center-right Christian Democratic Union (CDU) member Hans Tietmeyer: They all did their utmost to fight inflation.
As a result, it was not uncommon for Bundesbank presidents to clash with chancellors and cabinet ministers. Their disputes were usually about interest-rate increases, which the central bank used to avert risks of inflation. The governments, on the other hand, preferred low interest rates, because they hoped that this would stimulate the economy, bring down unemployment and improve their election prospects. But the keepers of the currency routinely proved to be stubborn.
Former Chancellor Konrad Adenauer berated then-Bundesbank President Vocke as a "stale refrigerator." Former Finance Minister Hans Matthöfer dismissed his counterpart Otmar Emminger as a "miserable know-it-all." And former Chancellor Helmut Schmidt referred to Helmut Schlesinger, who had long opposed the introduction of the European Monetary Union, as a "German nationalist."
The German government does not appoint the head of the Bundesbank. It can only nominate a candidate, who must be accepted by the Bundesbank board of directors before becoming president.
Keeping the Politicians Away from the Money Presses
The independence of the Bundesbank is a gift from the Western Allies. After World War II, the Americans and the British wanted to prevent political and economic power from falling into the same hands in Germany, as had been the case during the Hitler regime. They established the Bank deutscher Länder (Bank of German States), the precursor to the Bundesbank, as an independent institution. Later, all Bundesbank presidents took advantage of this freedom, albeit to varying degrees.
Hans Tietmeyer, head of the bank from 1993 to 1999, protected its gold reserves from then Finance Minister Theo Waigel, who wanted to use them to pay for some of the costs of German reunification.
Tietmeyer demanded strict adherence to the Maastricht criteria for the monetary union. He was suspicious of Italy's stability policy and, as a result, was berated by Italian newspapers as a descendant of the Huns.
It long seemed as if the Bundesbank tradition would live on in Europe's monetary authority. The ECB kept the money supply smaller than central banks in other parts of the world, and inflation rates in the euro zone were even lower than in Germany in the days of the deutschmark.
But then came the financial crisis, and the longstanding ECB president of the time, Jean-Claude Trichet, yielded to pressure from European leaders to rush to their aid with the central bank's theoretically unlimited resources -- at least a little.
Divided in the ECB Council
The ECB council has been divided since then. The representatives of the southern European countries are largely in favor of the bond purchases, while their German counterparts are strictly opposed.
Sometimes they can count on the support of central bankers from Luxembourg, the Netherlands and Austria. But this isn't sufficient for a majority because, under the ECB statutes, the central banks of euro countries like Malta or Luxembourg, both with only about half a million inhabitants, have the same vote as the Bundesbank.
To strengthen the Bundesbank's influence, the CDU proposes revising the balance of power in the ECB council. It wants larger countries with greater economic strength to receive more votes, as is commonly the case in many international financial institutions.
But the chances that this will enable the Bundesbank to strengthen its influence are slim. The European treaties would have to be amended to bring about the necessary reform. All countries would have to consent to this, a requirement that is regarded in Brussels as completely hopeless.
For this reason, Weidmann is not pinning his hopes of stopping the bond purchases on an ECB reform, but on the power of persuasion. As long as the ECB was only occasionally buying Portuguese or Greek bonds, Europe's central bankers were not particularly concerned. All it took was a few billions to bring yields down to the desired level.
But that has changed since the central bankers began buying up large quantities of Italian bonds. After only a few weeks, the ECB had purchased Italian government bonds worth close to €100 billion, so that even the notoriously nonchalant representatives from the continent's southern countries are now gradually asking themselves how much longer this can continue. Last week, Spanish ECB Executive Board member José Manuel González-Páramo stated: "The ECB is not a lender of last resort. It does not have a magic wand."
The new ECB president, Mario Draghi, is also no fan of an unlimited ECB mandate. In fact, he would prefer to unload the burden of the purchase program as quickly as possible. "It is pointless to think that sovereign bond yields could be stably brought down for protracted periods of time through external interventions," Draghi said in his first public appearance as ECB head.
Addiction to Free Money
But the politicians' addiction to tapping the seemingly free source of money at the central bank remains unbroken. They launched their most recent attempt with the help of the IMF and Italian ECB Executive Board member Lorenzo Bini Smaghi. According to a legal opinion Smaghi had recently ordered, the currency reserves, like gold, foreign currency and special drawing rights, do not belong to individual nations but to the ECB members as a whole.
It isn't difficult to guess what the purpose of obtaining the legal opinion was: Resources that belong to everyone can also be used for the community, such as to bolster the EFSF.
But the Bundesbank has rebuffed the most recent advances. It argues that the central banks' currency reserves are not available to be used as collateral for the financing of government agencies. According to an opinion prepared by the Bundesbank's lawyers, this is incompatible with the legal underpinnings of the EU. The Frankfurt experts also cited three paragraphs in the Treaty on the Functioning of the European Union, which state that loans by the ECB to countries or the direct acquisition of debt securities by the ECB are proscribed. In addition, they argued, the detour through the IMF is questionable, because it conceals the fact that the Europeans are ultimately the ones held liable.
It's clear that Weidmann's campaign isn't over yet. The worse the euro crisis gets, and the more countries require bailouts, the more pressure there is to use the central bank's ultimate weapon. Weidmann knows this, but he is determined to resist the pressure.
Of course, not even Weidmann can rule out the possibility that his strategy will ultimately lead to the breakup of the monetary union. But he believes that the likelihood is low, or at least lower than it would be if the bond purchases continue. And he feels that those purchases are only justified if they are democratically legitimized. Germany's top central banker clearly does not believe that the end justifies the means. He sees himself as the defender of the law, as the preserver of tradition at the Bundesbank, and as a combatant against the omnipotence of the financial markets, which are not just trying to exert control over politics, but over the central banks, as well.
Calls for the Big Bazooka
Only recently, a group of analysts from London were sitting in the black visitors' chairs in his office. They were the same analysts who, a few months earlier, had assured him that Italy was solvent and had no financial problems. Now they were urging him to fight the euro crisis with the central bank's "big bazooka." And he is supposed to take advice from these people, these so-called financial experts, who, in actuality, base their assessments on nothing but the breathlessly fast pace of the markets?
Weidmann has opened his office window, which offers a view of the Frankfurt skyline with its bank skyscrapers. The ECB tower, however, is hidden in the fog. "We at the Bundesbank," he says, closing the window with a smile, "are easier to see."
REPORTED BY DIETMAR HAWRANEK, MARTIN HESSE, CHRISTOPH PAULY, CHRISTIAN REIERMANN AND MICHAEL SAUGA
Translated from the German by Christopher Sultan
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