07 August 2012

Irish Times: Germany leaning towards ECB strategy in Berlin

Days after Mario Draghi clarified his London promise to do "whatever it takes" to stabilise the currency, Berlin is ready to follow the European Central Bank's pragmatic crisis strategy rather than the principled path of the Bundesbank across town.

Behind the technical talk, Mr Draghi was indicating that the ECB would look into new ways to buy up bonds of struggling eurozone members – Spain and Italy at present. The strategy would be conditional enough to appease eurozone governments, he promised, yet effective enough to impress markets. For 22 governing council members, the bond yields for Spanish and Italian bonds are “unacceptable”. For Mr Weidmann it is ECB bond-buying that is unacceptable, skirting dangerously close to monetary financing of states – a breach of ECB mandate – and increasing the risk of inflation.

High bond yields are, the Bundesbank argues, a market reflection of real problems and a useful incentive for reform. It points out that previous rounds of bond-buying drove interest rates down, at a cost of over €200 billion, only to see them rise shortly after. Officially this logic is shared by Berlin. But a shift away from this position is increasingly palpable.

Dr Merkel gave her public backing for Mr Draghi’s “whatever it takes” strategy, distancing herself both from Mr Weidmann, her former economic adviser, and the post-war culture of currency stability of Bundesbank. “Of course Weidmann is a different guy now and of course has to defend the Bundesbank legacy”, said a senior Berlin official. “But the position we’re taking now is more pragmatic.”

Mr Draghi insisted last week the Bundesbank chief was not “isolated” at the ECB. However sources inside the bank say Mr Draghi won over Bundesbank allies with a proposal to buy only short-term bonds – limiting the duration of ECB exposure to crisis countries – and by making a bailout application a prerequisite for intervention.

The compromise plan, with the aim of bringing in as many doubters as possible, was a group effort, headed by ECB executive board members Jörg Asmussen and Benoît Coeuré, with some political input from Berlin. By naming Mr Weidmann at the post-meeting press conference, some ECB watchers suspect that Mr Draghi, for all his claims to the contrary, has isolated the Bundesbank chief and destroyed any chance of getting him on side in for any future bond-buying deal.

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