Bundesbank May Gain ECB Ally as Latvian Joins Policy Team

The euro area’s newest entrant may give Bundesbank President Jens Weidmann an ally in his battle against monetary policy that he considers too risky.

Latvia’s Ilmars Rimsevics, 48, has joined the European Central Bank’s Governing Council after his country adopted the single currency on Jan. 1. His history of calling for budget cuts and structural reforms as the Baltic nation navigated a financial crisis echoes the views of Germany’s Weidmann, who has warned that easy money can derail fiscal efforts.

With rates in the euro area at a record low, unemployment near an all-time high and bank lending shrinking, ECB officials are debating how far to push monetary policy. A quarter of the 23-member council opposed the last rate cut in November and the addition of Rimsevics, who backed budget cuts and tax increases equivalent to 16 percent of the Latvian economy in 2008 and 2009, may make further easing harder to agree on.

“I can imagine Governor Rimsevics will emphasize that there are limits to what monetary policy can deliver,” said Andrew Bosomworth, managing director at Pacific Investment Management Co. in Munich who has met the central bank head. “I would expect him to support ongoing fiscal discipline in the euro zone.”

Fastest Growth

ECB policy makers will keep the benchmark interest rate unchanged at 0.25 percent when they meet in Frankfurt tomorrow, according to all 51 economists surveyed by Bloomberg.

Rimsevics, who declined to comment for this article, has worked at the Latvian central bank since 1992 and was re-elected for a third six-year term as governor last year. The country is the 18th euro member and the fourth from the former communist bloc after Slovakia, Slovenia and neighboring Estonia. Its economy is forecast to grow 4.1 percent this year, the fastest pace in the European Union.

That’s a turnaround from 2009, when gross domestic product shrank by 18 percent and led to one in five people being out of work. Since then, the nation of 2 million people has paid off the International Monetary Fund’s share of a 7.5 billion euro ($10.2 billion) bailout loan and returned to the bond markets. It expects a budget deficit of 0.9 percent this year, compared with 9.8 percent in 2009.

Rimsevics’s own compensation slid almost 40 percent to 77,000 lati ($150,000) in 2012 from 2008, according to his income declaration.

Rates Risk

Latvian policy makers “have not only the Bundesbank’s principles, but they’ve also experienced the hard medicine first hand,” said Christian Keller, an analyst at Barclays Plc in London. “Rimsevics is probably least likely to show a lot of sympathy for countries in the euro-area periphery that may try to get by with easy monetary policy and debt relief.”

Weidmann told Germany’s Bild newspaper last month that euro-area countries must persist with their structural adjustments. He said a prolonged period of low interest rates may delay reforms and rejected a debt cut for Greece.

Euro-area bond yields have fallen, reducing the urgency to trim deficits, since ECB President Mario Draghi promised in July 2012 to defend the single currency. That pledge led to a bond-purchase program, still untapped, that was opposed by Weidmann and is being examined by Germany’s Constitutional Court.

“Latvians realize that once you get in trouble the most important thing is to correct imbalances,” Rimsevics said at an investment conference at Bloomberg’s office in London in October. “If you do it immediately and correct these imbalances, I think you’re definitely going to succeed.”

Non-Resident Deposits

Draghi has signaled that there’s no immediate need for more stimulus. At the same time, he’s said he’s ready to act if necessary to maintain price stability. Euro-area inflation was 0.8 percent in December, well below the ECB’s medium-term goal of just under 2 percent.

Erik Nielsen, chief global economist at UniCredit Bank AG in London, advocates long-term loans to encourage lending to companies and households. Elga Bartsch, chief European economist at Morgan Stanley in London, says the ECB should cut interest rates further and take the deposit rate below zero to weaken the euro. The currency appreciated 4.2 percent against the dollar last year, eroding the competitiveness of euro-area exporters.

While Rimsevics is “conservative and hawkish, I see no reason at this stage why he would take an extreme view one way or another,” Pimco’s Bosomworth said.

Latvia’s euro membership has also thrown the spotlight on deposits at its banks by non-residents. Global Witness, a London-based anti-corruption campaign group, claims that regulation and client vetting aren’t adequate.

Rimsevics denies that Latvia’s banks will attract cash inflows from Russia, redirected from Cyprus after the Mediterranean nation’s economic collapse and bailout last year.

“Don’t expect that Jan. 1 comes and all of a sudden we have a new picture,” Rimsevics said at the October conference. “It took us a lot of effort to redo what has been damaged” after media reports that money would move from Cyprus to Latvia, he said.

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