Weidmann Says What No Politician Wants to Hear

Jens Weidmann is no longer his master’s voice

By Jeff Black and Tony Czuczka

Almost a year into his new job as the head of Germany’s Bundesbank, Weidmann, 44, has matured from Chancellor Angela Merkel’s discreet right-hand man at global economic meetings into one of the few European policy makers warning that governments are failing to do what’s needed to rescue the euro.

Weidmann’s public criticism of measures such as the “fiscal compact” -- hailed by its architects as the first step to economic union -- has pitted him against Merkel and European Central Bank President Mario Draghi as they struggle to hold the 17-nation euro region together. With Europe in recession and rising Spanish bond yields threatening to reignite the debt crisis after a three-month lull, the Bundesbank’s youngest-ever president says greater fiscal and monetary rectitude is the only way to win back investors’ trust.

“When he was appointed, the press pounced on him and cried ‘Merkel’s man’ because he had worked for her for a few years,” said Manfred Neumann, the professor of international economics at Bonn University who supervised Weidmann’s 1997 doctoral thesis and says he still talks with his former student. “He has shown that he isn’t.”

Weidmann’s arrival on the 12th floor of the Bundesbank’s landmark building in Frankfurt on May 1, 2011, may have been more of a homecoming than a departure.

‘Culture of Stability’

From 2003 to 2006, he led the central bank’s monetary policy and analysis division, serving under presidents Ernst Welteke and Axel Weber, one of his former professors and the man who recommended Weidmann to Merkel. He shared what he learned on his first day in charge, referring to the historic German anxiety about inflation that still stokes public mistrust of the joint currency.

“First of all, the Bundesbank stands for a culture of stability,” Weidmann said during his inauguration speech. Welteke, accepting the same post 12 years earlier in the infancy of the euro, said the Bundesbank’s job was to bring that culture to the rest of Europe.

For Weidmann, that has often meant saying no. With Spanish government officials and French presidential candidates pressing the ECB for additional help as borrowing costs increase, his stand may be tested.

Political Pressure

Francois Hollande, who is leading incumbent French President Nicolas Sarkozy in opinion polls before elections that conclude May 6, said April 20 that the ECB should cut interest rates and begin lending directly to governments to promote growth. In Spain, where bond yields are soaring, officials have started to call for the ECB to resume its asset-purchase program.

Governments have consistently looked to the ECB to battle the debt crisis and Weidmann has consistently been the man in the way. When the crisis spread last year to Italy and Spain, the euro area’s third- and fourth-largest economies, Weidmann opposed the ECB’s decision to intervene in bond markets and publicly slammed a proposal to allow the region’s bailout fund to borrow from the central bank.

“The idea that the required money will be created through the printing press should finally be brushed aside,” he said in a speech in Berlin in December. “Doing that would threaten the most important foundation for a stable currency: the independence of a price-stability focused central bank.”

No ‘Panacea’

Speaking in New York today, Weidmann pushed back against calls for the ECB to do more to fight the crisis.

“Monetary policy is not a panacea and central bank firepower is not unlimited, especially not in a monetary union,” he said. “We can only win back confidence if we bring down excessive deficits and boost competitiveness. And it is precisely because these things are unpopular that makes it so tempting for politicians to rely instead on monetary accommodation.”

Weidmann hasn’t spared Draghi or Merkel, who has vowed to prevent a breakup of the currency union and put the most money on the line for bailouts and financial backstops.

When European leaders agreed on the fiscal compact championed by Merkel in late January, Draghi said it was “the first step toward the fiscal union” and would “strengthen confidence in the euro area.”

Weidmann said it fell short.

“Obviously in the negotiations, as often in the past, things were watered down,” he said on Feb. 1. “It’s clear that the cornerstone for a real fiscal union hasn’t been laid here.”

Fiscal Rules

For Weidmann, putting Europe’s monetary union on a sound footing involves governments either giving up some sovereignty over national budgets or setting stricter fiscal rules and ensuring they’re enforced.

Neither has happened yet, he said during a March 28 speech at Chatham House in London. While charming his audience with humor and a down-to-earth style, Weidmann offered a sobering assessment.

“The time has come to move from containing the crisis to resolving it,” he said. “If we have the will to make the right choices, we will be able to rebalance Europe and lay the foundation for a stronger, more stable monetary union.”

A graduate of the 193-year-old Friedrich Wilhelm University in Bonn who spent time in France, Africa and at the International Monetary Fund, Weidmann was lauded for his “firmness and negotiating skills” by then French Ambassador Bernard de Montferrand when he was awarded France’s Legion of Honor at a ceremony in Berlin in 2009.

Unpalatable Truths

Yet his habit of serving unpalatable truths to former political masters and fellow monetary policy makers isn’t winning him friends, said Nick Kounis, head of macroeconomic research at ABN Amro in Amsterdam.

“I don’t really think that fellow policy makers are happy that he’s coming up with this,” said Kounis. “Disagreements on the Governing Council, especially between the Bundesbank and the president, can create a lot of uncertainty about the future course of policy. It can also lead to credibility issues for the central bank.”

Critics of Weidmann’s approach include billionaire investor George Soros, who said rising tensions in financial markets reflect concern that the Bundesbank is preparing for the end of the euro.

‘Self-Fulfilling Prophecy’

The German central bank is campaigning against “indefinite expansion” of the money supplyand seeking to limit losses it would face if the euro splintered, Soros said in a speech in Berlin on April 12. “This is creating a self-fulfilling prophecy.”

Things have not gone Weidmann’s way as the debt crisis presented the ECB with challenges few foresaw.

He was outvoted on Aug. 4 when soaring yields in Italy and Spain prompted the ECB to resume and expand its bond-purchase program, a decision that prompted chief economistJuergen Stark, a former Bundesbank vice president, to quit.

Weidmann later insisted the ECB should reduce its exposure to risky assets, which it was accumulating after allowing banks to use lower-quality collateral for central bank loans.

“The balance sheet of the Eurosystem is burdened with considerable risks,” he said on Sept. 13. “I am of the conviction that these should now be reduced and under no circumstances expanded.”

Six months later, the ECB’s balance sheet had swollen by almost 40 percent to 3 trillion euros ($3.9 trillion) after policy makers flooded the banking system with more than 1 trillion euros of three-year loans to help avert a credit crunch.

Bond Yields

Now there are calls for the ECB to again come to the rescue as concerns about Spain and Italy mount. Spanish 10-year bond yields have risen more than a percentage point since the start of March to exceed 6 percent, and Italy’s have climbed to 5.7 percent. Germany’s 10-year borrowing rate has dropped below 1.7 percent.

The ECB “should step up purchases of bonds,” Jaime Garcia-Legaz, a deputy minister in Spain’s Economy Ministry, said in an interview published April 14.

Weidmann is meanwhile pressing the ECB to come up with an exit strategy for its stimulus measures and shift the burden of crisis-fighting back onto governments.

He seems to be winning that battle for now, said Christian Schulz, an economist at Berenberg Bank in London who worked at the ECB from 2008 to 2011.

“In the short term, the Bundesbank can create enough fear of humiliation within the ECB that it leaves the pressure on the governments,” he said. “But the crisis has reared its head again and eventually, that might force the hand of the ECB.”