Jens Weidmann, head of Germany’s Bundesbank, has been a lonely voice among Europe’s central bankers for a decade.
In 2012, just after then European Central Bank chief Mario Draghi committed at the height of the sovereign debt crisis to do “whatever it takes to preserve the euro” — including printing vast sums of money to buy government bonds — Weidmann had warned “we shouldn’t underestimate the danger that central bank financing can become addictive like a drug.”
Since that point, the ECB has been locked in a bitter stand-off with the Bundesbank, which has repeatedly spoken out against the increasingly unconventional policies that have flooded Europe’s financial markets with cheap money.
These tensions were in the spotlight again this week when Weidmann, the longest serving of 25 members of the ECB governing council, announced he would step down as Bundesbank president six years before his mandate was due to expire.
The 53-year-old cited “personal reasons” for his decision. But colleagues say the Bundesbank boss had tired of fighting an often lonely battle against the ECB’s bond buying and negative interest rate policies and fears that more frustrating clashes lie ahead.
His decision to quit only weeks before the ECB will make crucial decisions on how much post-pandemic stimulus to provide has 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 role as bad cop once the eurozone came into existence to ensure that the eventual compromise at the ECB ended up where it should be,” said Dirk Schumacher, head of European macro research at French bank Natixis and a former ECB economist. “But sometimes I think they got too caught up in that and it was perceived as being stubborn.”
Once dismissed by Draghi as Nein zu allem — German for “No to everything” — Weidmann spent his early years as Bundesbank boss openly criticising the ECB’s ultra-loose monetary policies, including speaking out against them when they were challenged at the German constitutional court.
Weidmann often voiced the fears of many in his country who suspected Europe’s monetary union risked becoming a transfer union, where taxpayers of rich countries in the north pay to bail out profligate governments in the south.
Jürgen Stark, who himself quit as ECB chief economist in 2011 in protest over its government bond purchases, expressed sympathy with Wiedmann. “Nobody can support a policy against their own convictions for more than a decade,” Stark told the Börsen-Zeitung.
The two sides used to be on better terms. When the ECB was created in 1998 it was not only based a few blocks away from the Bundesbank’s offices in Frankfurt, but it was also modelled on the German central bank, which had earned widespread respect for avoiding the double-digit inflation rates that plagued most countries in the oil crisis of the 1970s.
Otmar Issing, a highly regarded economics professor who joined the euro area’s fledgling monetary institution from the Bundesbank in 1998, is widely credited with shaping the ECB as chief economist in its early years, including its use of money supply measures to decide interest rate policy and contain inflation.
Lucrezia Reichlin, a London Business School professor who was head of research at the ECB from 2005-2008, said: “When I was at the ECB it was a much more German institution. That changed under Draghi and now it’s much more independent.”
Many analysts blamed the Bundesbank’s inflation-fighting orthodoxy for the ECB’s ill-judged decision to raise interest rates twice in response to a shortlived period of higher inflation in 2011, just as the sovereign debt crisis was unfolding.
“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 briefly improved after Christine Lagarde took over at the ECB in 2019.
When the pandemic hit soon after, Weidmann even supported the launch of a €1.85tn bond-buying fund and backed the ECB’s new strategy to accept the potential for inflation to overshoot — an idea he had previously criticised.
However, tensions resurfaced as the economy started to recover from the pandemic and inflation surged above the 2 per cent ECB target. Weidmann was one of two ECB council members who spoke out in July against new guidance on when to start raising interest rates, which he complained had raised the bar for such a move too high.
Wiedmann will depart shortly after the ECB council meeting in December where it will say how it plans to wind down its €1.85tn Pandemic Emergency Purchase Programme (PEPP) and the stimulus it will provide after that.
Bundesbank officials have been unsettled by calls from some ECB council members for it to maintain a significant bond-buying scheme after PEPP ends and to loosen some of its self-imposed restrictions on asset purchases.
Next year “could be the ultimate test of whether the ECB takes the goal of fighting inflation more seriously than the finance ministers’ interest in low interest rates and bond purchases,” said Friedrich Heinemann, an economist at the Leibniz Centre for European Economic Research. “This is where Weidmann will be missed.”
Managing any fallout from this will fall to 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 difficult task to reset relations,” said Klaus Adam, economics professor at the University of Mannheim. “But the troubles will start if the majority on the ECB council wants to keep asset purchases going and inflation keeps rising.”