By Christian Vits, Jana Randow and Richard Tomlinson
On May 10, just hours after the European Central Bank stepped into government bond markets for the first time, Axel Weber broke ranks with most of his colleagues on the ECB’s Governing Council -- including his boss, President Jean-Claude Trichet.
“The purchase of government bonds poses significant stability risks, and that’s why I’m critical of this part of the ECB council’s decision,” said Weber, president of Germany’s Bundesbank.
His comments, in an interview with the Frankfurt-based Boersen-Zeitung that was later posted on the Bundesbank’s website, came after he had spent part of the previous night on an emergency ECB conference call, Bloomberg Markets magazine reports in its August 2010 issue.
As finance ministers in Brussels hammered out a European Union-led rescue package worth about $927 billion, Trichet persuaded almost all of his council colleagues that purchasing government bonds was essential to halt a bond market rout triggered by Greece’s yawning fiscal deficit.
One of the dissenters was Weber -- the top candidate to become the ECB’s third leader when Trichet’s eight-year term expires in October 2011. Weber’s words matter because he represents the central bank of more than one-quarter of the euro region’s economy and a German habit of fiscal discipline and price stability that most of the euro-member countries have broken.
Just as German Chancellor Angela Merkel held out on rescuing debt-stricken Greece until the last minute, Weber, 53, stands against getting the ECB too entwined with indebted nations.
‘First Among Equals’
“After Trichet, Weber is the first among equals,” says Juergen Michels, chief euro-region economist at Citigroup Inc. in London. “He’s not an ideologue, but he does represent a lot of the hard-money values that Germany is associated with.”
Weber’s intransigence presents a dilemma for European leaders, who must decide in the next year whom to pick as Trichet’s successor. The ECB president chairs a 22-member council of the heads of all 16 central banks plus a 6-member Executive Board.
By moving Weber from the Bundesbank’s bunker-like concrete building in northern Frankfurt to the Eurotower, the ECB’s 36- story glass-and-steel headquarters downtown, the member countries would be guaranteed an inflation fighter in the German tradition that underpinned the deutsche mark for half a century. They would also be choosing a plain-spoken former monetary economics professor who’s prepared to question policies he thinks are hazardous.
Wanting Him?
“Weber’s public opposition to a policy move by the ECB that the politicians are presumably very keen on could make his appointment a bit difficult,” says David Mackie, chief European economist at JPMorgan Chase & Co. in London. “They might feel: ‘Do we really want this guy to be in charge?’”
Weber was nonetheless right to warn about the danger of buying bonds, Mackie says. By taking the helm of the world’s second-most-important central bank, Weber would face “huge” challenges, says Nouriel Roubini, the New York University economist who predicted the financial crisis.
“There’s a rising risk of breakup of the monetary union, and the ECB will have to play an important role to prevent that from happening,” says Roubini, who sees Weber as the “leading candidate” for the top post.
Tackling the Deficit
Germany has a 2010 estimated budget deficit of 5 percent of gross domestic product, smaller than all but 4 of the 16 euro- member countries, and is fighting to keep the euro region under fiscal control. Merkel insisted Greece’s deficit be “tackled at its roots” before agreeing to the bailout package and is touting Germany’s constitutional amendment on fiscal restraint, which will start to go into effect in 2011, as an example to all euro governments.
The euro has plunged 13.8 percent this year against the dollar, falling below $1.20 on June 4. Even after the round of rescue measures announced by the EU and the ECB, the extra yield that investors demand to hold 10-year Spanish bonds over German bunds is close to a euro-era high of 216 basis points. (A basis point is 0.01 percentage point.)
Trichet’s successor thus may be confronted with the prospect of continuing to implement unconventional policy measures to safeguard the currency, such as wading deeper into the European debt market.
“The ECB has crossed the Rubicon with the bond purchases,” says Julian Callow, chief European economist at Barclays Capital in London. By June 4, the ECB had purchased 40.5 billion euros ($50.1 billion) of bonds, according to the bank.
First in Decades
If Weber takes over from Trichet, he’ll be the first German to win a top EU post since Walter Hallstein, who led the European Commission’s predecessor institution from 1958 to 1969. To get this far, Weber -- who has a British wife, Diane, and speaks fluent English -- gave up a two-decade-long academic career specializing in applied monetary and international economics when he became Bundesbank president in 2004.
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