Germany

GOLD KEEPER: Bundesbank President Jens Weidmann, here outside a safe at the money museum in Frankfurt, says the bank should be a ‘stability anchor’ REUTERS/Kai Pfaffenbach The once-mighty German central bank is now just one voice among many. Can Jens Weidmann get it to roar again? The Bundesbank’s fight to be heard

BY ANDREAS FRAMKE AND PAUL CARREL FRANKFURT, JULY 1, 2013

eeting in Bratislava’s neo-classical Reduta Seated two places to the right of ECB President concert hall on May 2 this year, the 23 men Mario Draghi in the grand, gilded room was Jens M who form the European Central Bank’s poli- Weidmann, chief of Germany’s Bundesbank and, in cymaking Governing Council were divided. his country’s post-war tradition, an inflation-fighting With inflation undershooting their target of close to hardliner. Weidmann resisted the impulse to cut, 2 percent and most of the euro zone in the clutches of worried it would have little impact and use up some recession, the vast majority wanted to cut borrowing costs. of the ECB’s remaining room for manoeuvre.

SPECIAL REPORT 1 GermanyFighting for influence: Jens Weidmann’s Bundesbank

A large screen on the wall showed fluc- tuating market prices. Ruthless inflation fighter The quiet German assessed the mood The Bundesbank developed a reputation as an inflation buster. Now the European Central Bank is doing its work around the oval table. A significant group in the room wanted to cut the main interest 1957 1999 rate by half a percentage point. Bundesbank was established Euro was introduced Seeing that a cut was inevitable, he chose 10 % German discount/short-term repo rate to accept it and instead focused on trying to limit its size. When Draghi brought the 8 meeting to a conclusion, Weidmann’s com- 6 ECB rate promise position prevailed: the bank would cut by a quarter point. 4 This is Weidmann’s world: a series of battles over basis points and policy shifts, 2 and rearguard actions fought with limited ammunition used to maximum effect. 0 Thrust into the Bundesbank presidency German annual inflation in 2011 when his predecessor resigned in -2 protest at ECB policy, Weidmann heads a -4 once-mighty institution that still employs 1951 1960 1970 1980 1990 2000 2010 nearly 10,000 people - far more than the 1,600 at the ECB - but which is struggling Sources: ECB; U.S. Bureau of Labor Statistics, Division of International Labor Comparisons. to adapt to life as just one of 17 national stakeholders in the ECB, albeit the biggest. The 45-year-old’s task is daunting: often in the minority at the ECB, he must use and far younger than his predecessors, the “Not all Germans believe in God, all his tactical nous to gain traction with president says his purpose was forged by but they all believe in the Bundesbank,” the Bundesbank’s conservative, inflation- early experiences, including childhood hol- quipped Jacques Delors, president of the fighting policies. idays in Italy, after which the family, mind- European Commission, in 1992. Failure would jeopardise Germans’ con- ful that the Italian currency was unstable, Five years later, a clash between then fidence in the ECB, and the euro - a sce- would quickly convert their remaining lira Bundesbank chief Hans Tietmeyer and the nario that could hit support for the single into deutschmarks. German finance minister, Theo Waigel, un- currency project in its biggest member state. derlined the Bundesbank’s power. QUO VADIS BUNDESBANK? Weidmann says his motivation is simple. On May 15, 1997, Waigel landed in a “A stable currency,” he told Reuters. Germans have long looked to the helicopter at its headquarters, marched in That is not something to be taken for grant- Bundesbank as a pillar of stability and and asked the board to revalue the bank’s ed in Germany, where the national psyche is guarantor of a stable currency. Its head- gold reserves that year in a ploy to help the still scarred by the experience of hyperinflation quarters, where Weidmann has his office government wriggle out of a fiscal straight- in the 1920s and Draghi, an Italian, is viewed on the 12th floor, is a fortress-like 1960s jacket and ease the path to the launch of with widespread distrust for pursuing policies building on the outskirts of Frankfurt that the euro. They refused. perceived to be fast and loose. over the decades became a monument to With the birth of the euro in 1999, the Many of the men who ran the Germany’s economic power. Bundesbank’s power as guardian of the Bundesbank as long ago as the 1980s are Formed in 1957, the German central deutschmark waned as Germany bound its fu- still active and behave like a Greek chorus, bank was a model for central bank inde- ture with the fate of the single currency project. warning that the ECB’s current course will pendence in the years that followed. In the Its struggle to cope with this reduced end in disaster. 1990s, a Bundesbanker giving a speech in influence has been further frustrated by This emboldens Weidmann in his mis- deepest Bavaria could send shockwaves the ECB’s policy response to the euro zone sion to be a ‘stability anchor’. Softly spoken across global markets. crisis.

SPECIAL REPORT 2 GermanyFighting for influence: Jens Weidmann’s Bundesbank

This has fuelled a sense of lost direction crucial role, warning about the medium- among some Bundesbank staff, who paint a term risks and the limits to monetary poli- picture of a bloated and moribund institution cy,” he told Reuters. lacking leadership and intellectual vision. The departures of Stark and Weber fu- “The Bundesbank used to be like a bull – elled German public suspicion of the ECB, strong. But with the euro, the bull has been fanned by a posse of conservative academ- castrated,” said one Bundesbank employee ics led by Hans-Werner Sinn, head of the with years of experience at the bank. “Now renowned Ifo research institute, who has it’s an ox, growing old – the meat isn’t get- denounced plans to make the central bank ting any better.” FADING STAR: A five Euro banknote in the supreme banking supervisor for the Staff are directionless, the employee said, Weidmann’s office.REUTERS/ Kai Pfaffenbach euro area - a project that could draw on and “increasingly in a situation where they Bundesbank expertise and give it a new say ‘I’ll wait for my pension cheque.’” lease of life. Weidmann recognises that the bank has The Bundesbank used to be This incessant criticism of the ECB been through a tough period after the res- like a bull – strong. But with the makes it harder for Weidmann to retain ignations of presidents Ernst Welteke, in euro, the bull has been castrated. German public support for Draghi’s bank. 2004 over an expenses scandal, and Axel Born in Solingen, near Duesseldorf Weber in 2011. Longtime Bundesbank employee in the industrial heartland of northwest Weber, Weidmann’s predecessor, quit Germany, Weidmann studied economics in in protest at the ECB’s first government Weber’s departure to Switzerland to Bonn and in France, and was an intern at bond-purchase programme. The policy was take up the position of UBS chairman even the French and Rwandan national central intended to help save the euro by lowering fed a sense at the Bundesbank that the banks. He then worked at the International borrowing costs for crisis-hit governments. leadership was transient and out for itself. Monetary Fund before later moving to the Weber believed that risked compromising “Where is the intellectual head who can Bundesbank, where he led the Monetary the central bank’s independence by taking draw a vision for the bank, and who is going Policy and Monetary Analysis group. it into the fiscal policy arena. to stay?” asked the long-serving employee. In 2006, he had to think hard when Juergen Stark, who acted as Bundesbank To address this unease, Weidmann has German Chancellor Angela Merkel asked president in 2004, followed Weber and quit made contact with the Bundesbank rank- him to move to Berlin, to serve as her eco- as ECB chief economist later in 2011 - also and-file a top priority. He holds staff lunch- nomics adviser. Moving back to Frankfurt in opposition to the bond-buying plan. es and “Weidmann direct” town hall-style was far easier. The resignations showed the Germans’ events across Germany. “I always wanted to return to the world of frustration that the ECB was morphing But to really keep his staff on side, central banking,” he said. “This is my home.” out of the Bundesbank cast in which it was he needs to give them a sense that the His patient style is having some success. forged: a mould based on ‘Ordnungspolitik’ Bundesbank can make a difference. LIMITED LEVERS - the dogma in which the role of a totally “At a European level, what policy deci- independent central bank is solely to en- sions can the board take? None. And peo- With fewer levers to pull than Schlesinger, sure stable prices, not to promote economic ple (in the bank) know that,” the employee Tietmeyer and other predecessors, growth and employment or to help govern- said. “People are waiting for a new mission.” Weidmann takes a cautious approach to ments with fiscal problems. However hard he finds it to influence policy, building his case slowly and influ- But Helmut Schlesinger, who preceded ECB policy, Weidmann has no intention encing opinion where he can. Tietmeyer as Bundesbank chief in the early of following Weber’s example and resign- Weidmann’s job is much more difficult 1990s, said the departures achieved little. ing. He believes he is better off staying in than that of his predecessors, said Clemens “The resignations of Weber and Stark the room and exercising influence rather Fuest, head of the ZEW economic institute didn’t achieve much politically - not at than sniping from the outside. and an academic adviser to the government in the ECB and also not with the govern- Stark endorses this role. Berlin who Weidmann sometimes consults. ment, which is a blow for the Bundesbank,” “The Bundesbank is not the anchor any- “He doesn’t have this enormous power Schlesinger, 88, told Reuters at his home in more that it used to be, at the beginning that former Bundesbank presidents had,” the hills outside Frankfurt. of the currency union. But it still plays a he added. “I think the fact that Axel Weber

SPECIAL REPORT 3 Germany Fighting for influence: Jens Weidmann’s Bundesbank

resigned highlights how difficult this job is. Personally, I think Weidmann does a very good job of playing this role.” Weidmann pulls the levers he does have to great effect. In March of this year, the Bundesbank used an accounting ploy to ram home to Berlin its concern that governments are pushing too much of the burden for deal- ing with the euro zone crisis onto the ECB. Presenting its 2012 results, the Bundesbank almost doubled its risk pro- visions due to what it saw as risky ECB policies to which it is exposed. The upshot was a much smaller transfer of Bundesbank profits to the German government than Berlin expected. The central bank increased its risk buffers by 6.7 billion euros to 14.4 billion euros, which meant the amount it transferred to the German government was hardly changed from the previous year’s 643 million euros despite “significantly higher interest income” in 2012. “He doesn’t want to let the governments off the hook,” said Fuest. Instead, he wants to focus on the core Germany’s federal Bundesbank President Jens Weidmann walks in a corridor of the Bundesbank business of price stability. This explains headquarters during a photo shoot with Reuters in Frankfurt May 17, 2013. REUTERS/Kai Pfaffenbach Weidmann’s readiness to accept the May rate cut, but limit it, while reining in the ECB’s ambitions in so-called ‘non-stan- Monetary Transactions (OMT) - that Draghi traction at the ECB, Weidmann said he dard’ policy areas, such as its endeavour to masterminded last summer must apply to a does not feel isolated. boost lending to small and mid-sized en- new bailout fund for an aid programme that “I feel very comfortable,” he said. terprises (SMEs). would require reforms and deficit cutting. This is paying off. Draghi has shifted Weidmann’s opposition to the bond plan Additional reporting by Eva Kuehnen, Noah from saying the ECB is looking for a so- helped ensure this condition was attached. Barkin and Annika Breidthardt; Editing by lution to the problem of SME lending to Now the court process threatens to gum Richard Woods and Simon Robinson pushing the issue towards the European up the plan completely, at least in the short Investment Bank. term. Political analysts say a verdict is un- To press his case, Weidmann has also likely before Germany’s September election. FOR MORE INFORMATION appeared in court. Sources close to the German govern- Paul Carrel, Chief ECB Correspondent Last month, he went into battle with the ment, which endorses the ECB’s most effec- [email protected] ECB at Germany’s Constitutional Court tive response to the euro crisis, have voiced Richard Woods, Senior Editor, Enterprise in a hearing into the ECB’s role in Europe’s concern that the court might try to get the and Investigations, EMEA crisis-fighting strategy. ECB’s mandate updated and demand it be [email protected] Countries wanting to tap a yet-to-be-used renegotiated with Berlin’s partners. Michael Williams, Global Enterprise Editor ECB plan to buy bonds - dubbed Outright Despite his constant battle to gain [email protected]

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