Weber Defies Trichet Over Europe Bond Bailout as ECB Succession Approaches
Axel Weber, president of Deutsche Bundesbank, poses for a photograph at a news conference in Frankfurt on March 9, 2010. Photographer: Hannelore Foerster/Bloomberg
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.
“It’s the combination of his gravitas as an academic but also as head of the Bundesbank that matters,” says James Nixon, co-chief euro-region economist at Societe Generale SA in London. “I find it really hard to see any other person in Germany who can play in the same league.”
Weber, who declined to be interviewed, grew up in Glan- Muenchweiler, a village of 1,200 people surrounded by tree- covered hills in southwestern Germany, about 45 kilometers (28 miles) from the French border. His father, Hans, taught at the local primary school and still lives in the village.
Shoulder-Length Hair
While he was a student at the University of Constance from 1976 to 1982, Weber sported shoulder-length hair and supplemented his income by working as a roofer when home during vacations, recalls Rudolph Hanss, a former co-worker. Fellow roofers nicknamed Weber “the theorizer” because of his academic background, says Hanss, who’s still employed at the same company. “But he certainly knew how to work.”
After graduating, Weber taught and did research from 1982 to 2004 at German universities in Siegen, Bonn, Frankfurt and Cologne. He ran Cologne’s marathon in 2002, registering a time of 4 hours, 7 minutes.
As an academic, Weber developed ties to the inner circle of Berlin politics. He was a member of the so-called Five Wise Men, the government’s panel of economic advisers, from 2002 to 2004. Former students include Deputy Finance Minister Joerg Asmussen and Jens Weidmann, Merkel’s chief economic adviser. Merkel has increasingly enlisted Weber to sell unpopular financial bailouts at home and abroad to skeptical politicians.
Time in Berlin
“He’s been very involved in rescuing the banks and dealing with the politicians,” says Joachim Fels, co-chief global economist at Morgan Stanley in London. “My guess would be that he’s spent more time in Berlin these past two years than Frankfurt.”
On May 19, Weber spoke in a cramped meeting room in Berlin’s rebuilt Bundestag building. His task: Selling the euro bailout program to lawmakers. He wasn’t enjoying himself. “I’m personally dismayed about the fact that following the bank rescue program and help for Greece, I am now appearing before the German parliament for the third time,” Weber said. “It creates the impression that one is being driven by markets and is not in control of markets.”
The Bundesbank president’s tone was counterproductive, says Steffen Bockhahn, a legislator for the opposition Left Party who attended the hearing.
That Human Touch
“Weber lacked sensitivity, that human touch that alleviates the job of conveying bad news,” he says. “When you’re trying to tell the keepers of the country’s public purse why they have to sign off on a huge aid package, a certain humanity can go a long way.”
Selling himself as the next ECB president may require Weber to improve his conciliation skills. “He positions himself explicitly,” says Klaus Liebscher, who headed the Austrian central bank from 1995 to 2008 and thus sat with Weber on the ECB council. “He’s always honest about his convictions but possibly not always diplomatic.”
Since becoming Bundesbank president, Weber has been a regular guest at the annual August conference of central bankers and economists hosted by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. During the afternoon break, he hikes for hours with fellow participants in the surrounding Teton Range.
Swiss National Bank President Philipp Hildebrand says he met Weber for the first time on such a jaunt in 2003 or 2004. “We started walking and marched far into the Grand Tetons,” he says. “I was impressed by his stamina and endurance. We just made it back in time for dinner.”
Economics Department
Inside the Bundesbank, Weber holds the reins tightly. One official says he wants to be No. 1 -- and wants others to accept that. For example, after he arrived at the German central bank, he assumed leadership of its economics department.
Weber reflects the Bundesbank’s traditional role as guardian of price stability. Runaway inflation gripped Germany in the early 1920s after the government printed bank notes to finance crippling World War I reparation payments imposed by the Allies. In 1957, the West German government created the Bundesbank, whose prime responsibility was to safeguard the mark as the bedrock of the country’s post-World War II recovery.
“When you talk with German monetary policy makers, they still have the 1920s hyperinflation in their minds,” says Stephane Deo, chief European economist at UBS AG in London. “They have an aversion to inflation that is much higher than in other countries.”
Implementing the Bailout
The Bundesbank, which gave up setting Europe’s de facto benchmark interest rate after the ECB took over in 1999, retains some powers. It acts as an agent for about a quarter of the bond purchases conducted by the euro region’s network of central banks -- in essence, helping implement the bailout package. And more than 70 percent of all European banks that accessed ECB money market funds last year did so through the Bundesbank.
While Weber generally advocates a tight monetary policy stance to counter inflation risks, he can quickly adapt to a crisis. After Lehman Brothers Holdings Inc.’s 2008 bankruptcy shattered confidence in financial markets and pushed Europe into its worst recession since World War II, Weber turned pragmatic. With other ECB council members, he became an advocate of pumping unlimited liquidity into the banking system to encourage lending and a supporter of lower interest rates.
‘Further Easing’
“Owing to a remarkable decline in inflationary pressures in the medium term and rapidly deteriorating economic prospects, euro-area monetary policy in my view has enough leeway for further easing if necessary,” Weber said at a banking conference in Frankfurt on Nov. 21, 2008.
He sometimes speaks more forthrightly.
Weber landed on Trichet’s so-called black list last November by revealing that the ECB would tighten its lending to banks. The list is drawn up by the ECB’s press division and given to all policy makers when they convene. The remarks breached ECB protocol that major announcements be made by the president. They also came within a week of a council meeting, when officials are supposed to refrain from commenting on policy.
Weber will temper his style if he becomes ECB president, says Allan Meltzer, political economy professor at Pittsburgh’s Carnegie Mellon University. “Anybody in that job will have to make consensus moves,” says Meltzer, who has known Weber for more than 30 years and is the author of a two-volume history of the U.S. Federal Reserve.
Draghi’s History
The only challenger for Trichet’s 35th-floor corner office is Mario Draghi, 62, governor of the Bank of Italy. His handicap may be his previous job as vice chairman of the international division of Goldman Sachs Group Inc. from 2002 to 2005. In 2000, Goldman Sachs helped Greece shave 2.4 billion euros from its official deficit through currency swaps, the New York-based bank said in a Feb. 21 statement. The Bank of Italy said on Feb. 17 that Draghi had “nothing to do with those transactions.”
Merkel, 56, has won French President Nicolas Sarkozy’s support for Weber’s candidacy, German magazine Spiegel reported in February, and the newspaper Handelsblatt said in May that Germany agreed to support the bailout package in return for a guarantee Weber would get the job. Government spokeswoman Sabine Heimbach denied there was a deal in a May 12 statement.
“If Merkel says she wants Weber, Sarkozy probably won’t stand in her way,” says Philippe Chalmin, an economics professor at the University of Paris-Dauphine who advises France’s government on economic policy. “Now it’s Germany’s turn.”
And it may be the turn of Weber, the former construction worker, to rebuild the ECB as a central bank that stands apart from governments. As he told Bundesbank employees in Mainz, Germany, on May 31: “The damaged foundations of the currency union need to be reinforced.”
To contact the reporters on this story: Christian Vits in Frankfurt at cvits@bloomberg.net; Jana Randow in Frankfurt at jrandow@bloomberg.net; Richard Tomlinson in London at rtomlinson1@bloomberg.net.
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