BERLIN - Even the ever competent European Central Bank (ECB) President Mario Draghi stumbled when he was asked how he was dealing with the fact that the Germans had reservations about his latest moves. That’s because the journalist at last week’s press conference didn’t address him as "President Draghi," but as "Herr Weidmann."
Of course, Jens Weidmann, president of the mighty Bundesbank (Germany’s central bank), is currently Draghi’s most bitter foe. The 44-year-old Weidmann was the only member of the ECB’s executive board to vote against Draghi’s plan to save the euro.
The Draghi plan calls for conditional but unlimited ECB purchase of government bonds from euro crisis countries. It is the big "bazooka" that many politicians and experts have been hoping for a year now would be brought out, but that many Germans fear because it could bring inflation with it. But Draghi has lined it up, and will be firing shortly.
The plan program, called the Outright Monetary Transaction (OMT), will be terminated when goals have been reached, Draghi said. With a bit of luck, that could be in a few months’ time. It could also be never.
What is clear, however, is that it’s a game-changer for the ECB, in that it is now in the business of financing national budgets. It will also in the future play a supervisory role with regard to the European banking system.
And that means that the ECB is developing away from the institution on which it was modeled – the Bundesbank – and could become a kind of “branch office” for European financial policy. Instead of the tiresome process of persuading national parliaments to approve additional billions to rescue a crisis-ridden country in Euroland, governments in the future could count on the fact that the ECB would continue to buy that country’s government bonds until the interest rates on those bonds were brought back down to a reasonable level.
This is not without potential dangers, not least because some crisis countries could put the brakes on reform if politicians know that under certain conditions the ECB can be called in to play fireman and extinguish the blaze. Draghi knows that too. Hence, the ECB will only step in when a crisis country officially seeks help from the European Stability Mechanism (ESM) and follows ESM conditions. Many observers say this was a particularly clever move, as ESM programs are agreed on by the Eurogroup, so no German finance minister can block planned help by voting against it.
Although he had wanted to avoid public statements until the German Constitutional Court takes its decision with regard to the ESM on Wednesday, after the ECB executive board meeting Bundesbank president Weidmann released a statement that said that he regarded “such [bond] purchases as being tantamount to financing governments by printings banknotes.” Furthermore, the “announced interventions carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers.”
Some of those close to Weidmann were unimpressed with the announcement: “Longer term, he didn’t do himself any favors,” said one.
The next rift
The next disagreement could follow in a matter of weeks, because the ECB is expected to shoulder another burden besides financing governments: according to European Commissioner for Internal Market and Services, Michel Barnier, the ECB should function in a supervisory capacity with regard to euro-zone banks.
The new development has already encountered resistance on the part of German Finance Minister Wolfgang Schäuble who told German radio that he did not believe the ECB has “the potential to supervise … 6,000 banks in the foreseeable future.”
Such a strong role could threaten the independence of the central bank. In emergency situations, it has been the job of finance ministries to close and wind down banks – and take the pressure that a decision of that type can bring with it. One EU diplomat said that in his view a potential danger of the Barnier plan lay in governments suing the ECB in the event of bank bankruptcies and accusing them of having failed in their supervisory role. "Where would the central bank be then?"
But it would virtually impossible to reverse course. And whoever had thought that the Bundesbank, as major shareholder, could quash decisions not to its liking has set themselves up for disappointment. "The ECB is developing its own character. It’s not the Bundesbank, and we have to deal with that," says Ulrich Kater, chief economist at DekaBank.
What could result is a mixture of Bundesbank dogmatism that values financial stability above all else, and the pragmatism of southern countries. The danger is that it slants too much south. Says one German currency watchdog: "There’s no way the euro should be rescued at any price."
President Draghi sees things differently. He says the ECB will do everything to save the euro: "The euro is irreversible.” Germany’s Chancellor Angela Merkel sings a similar tune: "If the euro fails, Europe fails." The difference is that Merkel is an elected official – and Draghi isn’t.
"Elected governments will decide if the euro should be rescued or not – that is not the business of the ECB or its president," said Markus Kerber, a professor at Berlin’s Technical University who initiated a lawsuit against the ESM and is keeping his options open to do likewise as regards the ECB.
At his very first press conference as ECB boss, Draghi stated: "I have great admiration for the tradition of the Bundesbank. I was in the Treasury in Italy in the 1990s and we had many opportunities to work with Hans Tietmeyer and Helmut Schlesinger, so I developed a very great admiration for this institution throughout these years. 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.”
We now have the answer.