Austerity's Advocate: A Date With Dr. Nein
All around Jens Weidmann, the hard-money ramparts of the 13-year-old euro fortress are crumbling. On April 22, French President Nicolas Sarkozy, a voice for fiscal restraint, finished second to Socialist candidate François Hollande in the first round of presidential voting, jeopardizing Sarkozy’s reelection prospects. A day later an even bigger shock came from one of Germany’s closest allies: Dutch Prime Minister Mark Rutte tendered his Cabinet’s resignation to Queen Beatrix after failing to garner sufficient support for austerity measures. Spain and Italy, meanwhile, warn they will miss deficit-reduction targets that they only recently committed to. In country after country, European voters are turning to politicians whose motto is growth now, cuts later.
As Europe’s strongest defender of fiscal probity, Weidmann is fighting the Keynesian tide. The 44-year-old blond with a diffident smile and a quiet demeanor is austerity personified. Since last year he has been president of the Deutsche Bundesbank, Germany’s central bank, which is fiercely devoted to preventing a recurrence of the hyperinflation that ruined Germany’s middle class in the 1920s.
Weidmann’s devotion to austerity is even purer than that of German Chancellor Angela Merkel, for whom he once worked at the Chancellery in Berlin as an economic adviser and sherpa at G-8 and G-20 summit meetings. “Merkel has embraced European integration as the make-or-break issue of her chancellorship,” says Christian Schulz, a London-based senior economist at Berenberg Bank, Germany’s oldest. “Weidmann has a narrower responsibility. [It’s] not all of Europe or even all of Germany. His responsibility is price stability.”
It’s no exaggeration to say that the future of Europe depends on who wins this fight: Weidmann and his allies or the forces arrayed against them. Euro zone unemployment is stuck in double digits, and a crisis of investor confidence that has already forced Greece, Ireland, and Portugal to seek bailouts threatens to claim Spain as well. Backers of “growth now” warn that austerity is plunging Europe into a depression in which fiscal stringency reduces growth, drying up tax revenue and forcing even deeper spending cuts, and so on in a downward spiral.
Weidmann, in the sober tradition of the Bundesbank, sees things differently. He believes that while deficit spending made sense as an emergency measure, it has gone on for too long, killing business confidence and investment while driving up debt and interest rates, thus making Europe’s long-term challenges ever graver. He rejects the argument that the European Central Bank is “the last man standing” in the euro zone and must therefore bend its rules to make money easier and credit more freely available. His prescription for growth is “structural reform”—exercise and diet for an out-of-shape patient, not more medicine.
Weidmann knows he can’t win this argument with political muscle alone. True, Germany is the euro zone’s biggest economy, and because of capital flight from the periphery to Germany, the Bundesbank has built up a credit of more than €600 billion (about $800 billion) against the other central banks in the euro system. Even so, Weidmann’s ex-officio seat on the Governing Council of the European Central Bank gives him just one vote out of 23—the same as Malta. There is only one other German voter on the council, his friend Jörg Asmussen, who sits on the executive board. Germany’s disproportionately feeble voting power helped prompt the resignations from the Governing Council last year of two hawkish Germans: Jürgen Stark and Weidmann’s predecessor at the Bundesbank, Axel Weber.
Weidmann would rather win than quit in a blaze of glory. So he’s amping up the argument, making the Bundesbank’s case to anyone who will listen. After a speech to the Economic Club of New York on April 23, he chatted amiably with everyone from former Federal Reserve Chairman Paul Volcker and hedge fund kingpin John Paulson to junior bankers who eagerly proffered their business cards. After that he did a TV spot, mugged for another photo session, and then sat down for a magazine interview while hotel staff noisily carted off furniture.
Asked whom he admired when he began studying economics as a university student in France, Weidmann cites the late James Tobin, the arch-Keynesian from Yale University. “He was somebody I liked to read at the time,” Weidmann offers. But doesn’t Weidmann disagree with everything Tobin stood for? “You can especially learn from people if you don’t share their ideas,” he explains, charmingly.
Does he care less about keeping the euro zone intact than he does about keeping inflation under control? Seemingly yes. “I have a mandate,” he says. “I have one overriding objective, which is price stability. That is fully consistent with monetary union if”—and he hits the “if” hard—“national policy makers do their job. If we have fiscal slippage, erosion of incentives for sound public finances, you have a monetary union that won’t last.” In other words, Europe’s real problem is overspending politicians.
Weidmann knows he risks becoming isolated on the ECB’s Governing Council. “I have to work with the legal framework I have. Voting against something doesn’t stop it.” That leaves talk. “I’m very publicly making my point,” he says, stating the obvious. “I’m trying to convince, trying to persuade.”
Weidmann has “a very clear brain,” enthuses a fellow conservative, Hans-Werner Sinn, president of the Ifo Institute, an economic research think tank at the University of Munich. He is “very hardworking, extremely well-organized—a typical German in the good sense,” adds Ewald Nowotny, governor of the Austrian central bank.
If there’s a rap against Weidmann at the ECB, it’s that he’s too political—too “Berlin” in contrast to the clubby ways of Frankfurt, where the Bundesbank and the ECB sit four kilometers apart. Weidmann sharpened his political talents while working for Merkel from 2006 to 2011. This year he criticized ECB actions in a private letter to the bank’s president, Mario Draghi, that somehow was leaked to the hometown newspaper, Frankfurter Allgemeine Zeitung. Draghi carefully told reporters, “I don’t think that the leak came from Jens himself. I am certain that it was not him.” Bundesbank spokesman Michael Best writes in an e-mail: “Personally I’m sure that the one who leaked the letter can’t be close to Mr. Weidmann. It’s not our style.”
Draghi hasn’t let the Bundesbank stop his rescue efforts, even gleefully describing the trillion-euro liquidity injection that began last December as “Big Bertha,” an allusion to a German howitzer from World War I. “Mr. Draghi does the right thing without asking the German government if he’s allowed to do it or not,” says Peter Bofinger, the lone Keynesian on the German Council of Economic Experts.
Yet even if Weidmann can’t block Draghi’s moves, he can still drag his heels. In a mostly symbolic move, the Bundesbank has said it will no longer accept as collateral bank bonds that are guaranteed by the governments of Ireland, Greece, or Portugal. “Disagreements on the Governing Council, especially between the Bundesbank and the president, can create a lot of uncertainty about the future course of policy. It can also lead to credibility issues for the central bank,” says Nick Kounis, head of macroeconomic research at ABN Amro Bank in Amsterdam.
The Bundesbank’s influence diminished the effectiveness of Draghi’s Big Bertha, argues Paul De Grauwe, a professor at the London School of Economics. He says the ECB should have bought the debt of European governments in the secondary market instead of lending money to the banks so they could buy the bonds. The Bundesbank, under Weidmann, has insisted that bond purchases would be unlawful because the ECB is prohibited from financing governments. It’s a classic stance for the Bundesbank. “A ‘no,’ because of the role of the Bundesbank, is a very important ‘no,’” Weidmann observes.
As Weidmann says no, though, a slumping European economy is making it perilous for even his allies to stand with Germany. (Ask the outgoing Dutch prime minister.) The incipient political turn away from austerity threatens to undo everything the Bundesbank stands for. That is why Weidmann is on the road, preaching that austerity remains in Europe’s long-term interest. “The public is really for a stability-oriented central bank,” he says. “That has always been the case in Germany.” The deeper Europe’s crisis gets, the harder it will be for Weidmann to persuade others to see it his way.