Farewell to Europe’s old guard

Published in Business Spectator (Melbourne), 17 February 2011 

Last week’s unexpected resignation of Bundesbank president Axel Weber sent shockwaves through the German government. It reignites the debate about the best way to deal with the euro crisis, the policies of the European Central Bank (ECB) and Germany’s role within European Monetary Union. It also poses questions about an institution that was once regarded as the best central bank in the world.

Weber, a 53-year-old economics professor, was seen as the most likely successor to Jean-Claude Trichet, whose term at the top of the ECB ends this year. For Bundesbank observers, however, the tensions between him, his ECB colleagues and European governments were becoming more and more visible. When the ECB started purchasing government debt, the hawkish Weber made his disagreement public, virtually isolating himself among Euro policymakers.

Weber’s unexpected departure from the monetary scene means that replacements have to be found both at the national and at the European level. The bigger challenge, however, is the loss of credibility the ECB has suffered after it lost one of Europe’s most qualified and respected monetary experts. Meanwhile, for the prestigious Bundesbank it is a further step on the way to irrelevance.

Few institutions in Germany command such high esteem as the Bundesbank, the central bank of hearts. Though all its important functions are now transferred to the ECB, the Germans cling on to the almost mythical image of their beloved Bundesbank. Located in Frankfurt, it once stood for healthy stability, robust independence and unquestionable integrity.

Whether the idealised notion of the Bundesbank always corresponded to reality is a matter for debate. What is clear, though, is that the last two decades have not been good for the bank. And it is not only the Euro’s fault.

The Bundesbank’s slow decline began just after German unification. Chancellor Helmut Kohl had promised the deutschemark to the East Germans at a ridiculously inflated exchange rate, brushing aside any concerns of the central bank. The Bundesbank’s long-serving president, Karl Otto Pöhl, resigned in protest soon afterwards and went on to work for private bank Sal. Oppenheim. Though the government got its desired exchange rate, Pöhl may feel vindicated because the unrealistic exchange rate was as disastrous for the East German economy as he had predicted.

The following years were a bumpy road for the central bankers from Frankfurt. Although the bank’s independence had long been regarded as sacred, finance minister of all parties repeatedly tried to pressure the bank into revaluing its gold reserves. This would have allowed it to generate profits that could then be passed on to the treasury. Although the Bundesbank managed to fight off such attempts, the incidences left the impression that the bank had become fair game for political interference.

Another dent in the bank’s reputation resulted from a scandal in 2001. Bundesbank president Ernst Welteke was accused of unduly accepting favours from commercial banks that he was supposed to supervise. He and his family had received invitations for lavish hotel stays and a VIP package for the Monaco Formula 1 race from Dresdner Bank and BMW. The affair ended in Welteke’s resignation, who then went on to fight for an increased pension through the courts. All of this did not help to increase public trust in the bank and its officials.

Last year, the bank made negative headlines once again. One of its board members, former state treasurer Thilo Sarrazin, had written a book on migration and public policy. Both chancellor Angela Merkel and federal president Christian Wulff intervened and pressured the bank into dismissing its controversial board member. As central bankers are virtually unsackable, this would have been an unlawful assault on the bank. It was only defused by Sarrazin’s voluntary resignation, which he claims spared the country a constitutional crisis.

By all accounts, the golden age of the Bundesbank has been over for some time. When the euro was introduced, the Germans had been promised it would be ‘as hard as the mark’. As a symbol, the ECB was modelled on the Bundesbank and even located in Frankfurt.

Now, a decade later, it is clear that the old Bundesbank is a phase-out model. The ECB’s monetary policy is laxer than the Bundesbank’s had ever been. The purchase of government bonds violates long-held taboos, and even the primary aim of price stability is now openly questioned by governments.

In many ways, it was Axel Weber who was the last remaining central banker in Europe clinging on to the Bundesbank model of times past. But with his staunch insistence on ‘order policy’, ‘sound money’ and ‘political neutrality’ he sounded more and more old-fashioned.

Reading the interview about his departure in this week’s Der Spiegel, it is obvious how much Weber felt like a foreign object in today’s world of Eurobonds, government bailouts and stability facilities. This is why he resigned from the Bundesbank. This is also why he does not want to head the ECB, with whose policies he no longer agrees.

As if to confirm that Weber’s view is right, the German government is on the verge of replacing him at the helm of the Bundesbank with Jens Weidmann. There are no doubts about the 42-year-old’s economic qualifications (after all, he was a student of Weber’s), but his current job as Angela Merkel’s chief economic advisor hardly underlines the Bundesbank’s independence.

It may not matter much, though. Soon after he left, Thilo Sarrazin explained that a typical Bundesbank working week was over by Tuesday lunchtime. After that, there was nothing left to do for a bank whose main functions had been absorbed by the ECB.

If Axel Weber needs any advice about his future, he’d only need to talk to his predecessor Karl-Otto Pöhl. Not only could Pöhl tell him how sweet it is to be vindicated by history. He could also tell him how he found himself a lucrative job with a commercial bank soon after his central bank career – never mind that he had just been in charge of banking supervision. There are rumours that Weber could succeed Josef Ackermann as CEO of Deutsche Bank.

Margaret Mitchell once said, ‘until you’ve lost your reputation, you never realise what a burden it was’. It almost sounds as if she was talking about the Bundesbank.

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