Can Weidmann’s exit help Germany rebuild frayed relations with ECB?

Jens Weidmann, head of the German Bundesbank, has been a lone voice among European central bankers for a decade.

In 2012, just after the commitment of the head of the European Central Bank, Mario Draghi, at the height of the sovereign debt crisis, to do “whatever it takes to preserve the euro” – including by printing huge sums of money to buy government bonds – Weidmann had warned that “we should not underestimate the danger that central bank funding could become addicting like a drug.

Since then, the ECB has found itself at an impasse with the Bundesbank, which has repeatedly spoken out against the increasingly unconventional policies that have flooded European financial markets with cheap money.

Those tensions were in the spotlight again this week when Weidmann, the oldest of the 25 members of the ECB’s governing council, announced he would step down as Bundesbank presidency six years before his term expired.

The 53-year-old cited “personal reasons” to justify his decision. But his colleagues say the Bundesbank boss was tired of waging an often lonely battle against the ECB’s bond-buying and negative interest rate policies and fears more frustrating clashes could loom up there. ‘horizon.

His decision to step down just weeks before the ECB made crucial decisions on what post-pandemic stimulus measures to provide prompted some German economists to warn that the country was losing one of its vital bulwarks against fiscal and monetary excesses. .

“The Bundesbank had to play this bad cop role once the eurozone was created to ensure that the possible compromise at the ECB ends up where it should be,” said Dirk Schumacher, head of European macro research at the French bank Natixis and former ECB Economist. “But sometimes I think they got too involved in it and it was seen as being stubborn.”

Once dismissed by Draghi as German Nein zu – German for “No to everything” – Weidmann spent his early years as Bundesbank boss openly criticizing the ECB’s ultra-flexible monetary policies, especially in s ‘expressing against them when they were challenged before the German Constitutional Court.

Weidmann has often expressed the fears of many in his country who suspected that the European monetary union risked becoming a transfer union, where taxpayers in rich countries in the north pay to bail out libertine governments in the south.

Jürgen Stark, who himself stepped down as chief economist at the ECB in 2011 to protest his purchases of government bonds, expressed sympathy for Wiedmann. “No one can support a policy against their own beliefs for more than a decade,” Stark told the Börsen-Zeitung.

Both sides were on better terms. When the ECB was formed in 1998, it was not only based a few blocks from the Bundesbank offices in Frankfurt, but it was also inspired by the German central bank, which had gained respect for avoiding rates. double-digit inflation that plagued the country most in the oil crisis of the 1970s.

Otmar Issing, a highly regarded economics professor who joined the young euro area monetary institution from the Bundesbank in 1998, is widely credited with shaping the ECB as chief economist during its early years, including including its use of money supply measures to decide interest rate policy and contain inflation.

Lucrezia Reichlin, professor at the London Business School and head of research at the ECB from 2005 to 2008, said: “When I was at the ECB it was a much more German institution. It changed under Draghi and now it’s much more independent.

Many analysts have blamed the Bundesbank’s anti-inflation orthodoxy for the ECB’s misguided decision to raise interest rates twice in response to a brief period of rising inflation in 2011 , as the sovereign debt crisis unfolded.

“The Draghi years [2011 to 2019] were the emancipation of the ECB from the Bundesbank, ”said Carsten Brzeski, head of macro research at Dutch bank ING, adding that relations with the German central bank improved briefly after Christine Lagarde took office at the ECB in 2019.

When the pandemic struck soon after, Weidmann even backed the launch of a € 1.85 billion bond purchase fund and backed the ECB’s new strategy to accept the potential for overshooting of inflation – an idea he had already criticized.

However, tensions resurfaced as the economy began to recover from the pandemic and inflation exceeded the ECB’s 2% target. Weidmann was one of two ECB board members who spoke out in July against new guidelines on when to start raising interest rates, which he said had set the bar too high for such decision.

Wiedmann will leave shortly after the ECB council meeting in December, where he will discuss how he plans to end his € 1.85 billion Pandemic Emergency Purchase Program (PEPP) and the stimulus measures it will provide thereafter.

Bundesbank officials have been disturbed by calls from some members of the ECB board to maintain a major bond buying program after the PEPP ends and to ease some of its self-imposed restrictions on purchases of assets.

Next year “could be the ultimate test of whether the ECB takes the goal of fighting inflation more seriously than finance ministers’ interest in low interest rates and bond purchases” said Friedrich Heinemann, economist at the Leibniz Center for European Economic Research. “This is where Weidmann will be missed.”

Dealing with the fallout from this will rest with whoever the German government chooses to replace Weidmann once talks on forming a new three-way ruling coalition are completed – creating an opportunity to rebuild bridges with the ECB.

“His successor will have the heavy task of restoring relations,” said Klaus Adam, professor of economics at the University of Mannheim. “But the trouble will start if the majority on the ECB board wants to maintain asset purchases and inflation continues to rise.”


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