BY SIMON TILFORD * – Foreign Policy
The front-runner to lead Europe’s central bank doesn’t seem to believe in central banking.
Germany’s political and economic establishment believes its handling of the eurozone crisis and its aftermath has been vindicated. After all, the eurozone is intact and enjoying an increasingly robust economic recovery. This conveniently ignores, of course, that the euro survived because of European Central Bank chief Mario Draghi’s promise to do “whatever it takes” and buy as many government bonds as was necessary to prevent the banking systems of Italy and other crisis-riven countries from collapsing, and the euro with them. This promise drew fierce criticism in Germany and Jens Weidmann, head of Germany’s Bundesbank, was the only member of the ECB’s governing council to oppose it.
The selective reasoning of Germany’s elite could be dismissed as mere vanity. But it may soon have very real consequences. Europe’s informal geographic carve-up of leadership positions (with Spain’s Luis de Guindos having just been named an ECB vice president) has made Weidmann the clear favorite to succeed Draghi when his term as president comes to a close next year. Both of the country’s major parties, the Social Democratic Party and Christian Democratic Union/Christian Social Union, which have again formed a coalition, seem prepared to spend political capital to help Weidmann acquire the post.
Within Germany, Weidmann represents orthodox thinking, but among Europe’s most respected monetary officials, he is an eccentric. If he ascends to the ECB’s presidency, it will be no laughing matter. Europe’s central bank would then be led by someone who not only opposed the many extraordinary measures that saved the eurozone (and with it the bank itself), but who also appears to reject basic tenets of modern macroeconomics and central banking.
It’s clear that after Dutch, French, and Italian presidents of the ECB, the Germans believe it is their turn. Germany is the biggest economy in the eurozone and, in many German eyes at least, its anchor and savior. With the French and Italian governments keen to win German support for institutional reforms of the way the eurozone is run, they are in a weak position to resist German pressure to put Weidmann at the helm. And the Germans can rely on support for the Dutch, Slovaks, and Baltic states.
Angela Merkel’s decision in 2011 to appoint Weidmann head of the Bundesbank belies Germany oft-heralded commitment to central bank independence. An advisor to Merkel, and prior to that secretary of the German Council of Economic Experts — an academic body that advises German policymakers — Weidmann had few qualifications for central banking. Indeed, someone with so little central banking experience would not be appointed to head up the Banque de France or Bank of England or the Banca d’Italia.
The head of the ECB, meanwhile, is the most demanding central banking job in the world, requiring intellectual caliber, serious political skills, and an ability and readiness to think like a European rather than as a national of a particular member state. Yet Weidmann has not defended the ECB to a skeptical German public, restricting himself to a call for politicians to respect the independence of the institution following unprecedented criticism of it by the previous German finance minister, Wolfgang Schäuble.
Instead, Weidmann has pursued the perceived interests of his home state more assiduously than any other member of the ECB’s governing council. He is a strong sceptic of any policy initiative that would involve any pooling of risk between members of the eurozone, or the creation of a common safe asset in the eurozone. He has even resisted eurozone deposit insurance on the grounds that eurozone banks have sizeable holding of government bonds on their books.
But is it not possible that having a German at the head of the ECB could reconcile the German public with the Economic and Monetary Union? Once in place, Weidmann will no longer need to court the support of Germany’s politicians and the country’s at times nationalistic media. He will be forced to think about the needs of the eurozone rather than simply opposing the bank’s chosen strategy. By forcing the Germans to own the problem, could it even increase the chances of Germany backing the institutional reforms needed to strengthen the currency union?
There is nothing to suggest this would happen. In terms of his economic philosophy, Weidmann is firmly in the German tradition, where central banking is considered to be a relatively simple business: crises are believed to arise because countries have not done their supply-side homework or have not been “playing by the rules,” not because the complexities of financial and economic interaction periodically produce crises that require unorthodox or extraordinary central bank intervention. Indeed, such intervention, Weidmann believes, can only delay the eventual day of reckoning. Weidmann, and German politicians and economists more generally, believe that what they advocate is in the interests of the whole of the eurozone, not just Germany.
Consider a speech Weidmann delivered around the same time as Draghi’s August 2012 declaration that he would “do whatever it takes.” Weidmann seemed to go to the precipice of criticizing the existence of fiat money. He referred to the passage in Goethe’s Faust where Mephistopheles — a Satanic character — advises the indebted emperor to print money to prevent economic crisis. For Weidmann this highlighted “the core problem of today’s paper money-based monetary policy” and the “potentially dangerous correlation of paper money creation, state financing, and inflation.” Weidmann was a strong sceptic of the ECB’s launch of quantitative easing in early 2015 despite falling eurozone consumer prices, and he has made a principled stand against any expansion of the European Financial Stability Facility, which extends loans to struggling members of the eurozone.
A Weidmann presidency will not change the culture of the eurozone’s central bank overnight. As anyone familiar with it knows, the ECB is staffed with highly competent internationalists who understand the challenges facing the currency union. The research they provide the governing council with will not change. Nor will having a German at the helm suddenly swing the balance of power within the governing council; Germany would max out at having two votes – one for the presidency of the ECB, and one for the Bundesbank. Weidmann will still have to win intellectual arguments, something he has conspicuously failed to do at ECB meetings.
The ECB might raise interest rates slightly more quickly than if Draghi were to remain president, though it is unlikely the ECB would accelerate its withdrawal from quantitative easing. The big danger of a Weidmann presidency will come further down the line, when the eurozone faces another crisis, either as result of a recession or a political crisis in one or more member states. This will be when leadership matters. Draghi has huge credibility with the markets. Through force of intellect and understanding of the interests of all member states of the eurozone, he has been able to convince doubters in the Netherlands, Austria, and elsewhere of the case for unprecedented action, such as the “whatever it takes” promise. Weidmann will not be able to do this, not least because he will almost certainly not believe in it himself.
Of course, much will depend on the length and strength of the current eurozone economic upturn and how widely its benefits are shared across the currency union. The longer and stronger the recovery, the more space the authorities will have to counter the next recession: Public finances will be stronger, allowing governments to boost spending without breaking the fiscal rules, while the ECB will have been able to raise interest rates significantly, allowing it to cut them to fight off recession. The current economic upturn might go on for a while, but it is difficult to see it going on long enough for the weaker members of the eurozone to have accumulated enough ammunition to fight the next downturn or for the ECB to have had the space to raise rates significantly.
One might imagine that, in return for other countries’ support for a Weidmann presidency, Germans might be obliged to agree to substantive reforms of eurozone governance, such as the completion of the currency union’s banking union, or the issuance of eurozone debt, and that such reforms would reduce the changes of another crisis, rendering it less important who heads up the institution. But it would be a mistake to rely on such concessions. Germany will no doubt support enough in the way of reforms to win the backing of the French and Italians, probably by conceding the creation of a eurozone finance minister with a small budget or an embryonic eurozone unemployment insurance scheme. But the CDU/CSU cannot concede more than this without further inflaming support for the right-wing populist party Alternative für Deutschland.
The prospect of a Weidmann presidency should already be a real worry across Europe. The continent’s fractured politics and rising populism — especially after last weekend’s Italian election — mean there will be no big step forward in terms of eurozone governance anytime soon. The future of the euro will thus remain in the hands of the ECB. It matters tremendously, in other words, who heads up the central bank — and it’s clear that Jens Weidmann is not the right person for the job.
*Simon Tilford is chief economist at the Tony Blair Institute for Global Change.