01 July 2013

Reuters Special Report: The Bundesbank's fight to be heard

Thrust into the Bundesbank presidency in 2011 when his predecessor resigned in protest at ECB policy, the inflation-fighting hardliner Weidmann heads a once-mighty institution that still employs nearly 10,000 people - far more than the ECB - but which is struggling to adapt to life as just one of 17 national stakeholders in the ECB, albeit the biggest.

Weidmann's task is daunting: often in the minority at the ECB, he must use all his tactical nous to gain traction with the Bundesbank's conservative, inflation-fighting policies. Traditionally, a stable currency is not something to be taken for granted in Germany, where the national psyche is still scarred by the experience of hyperinflation in the 1920s and Draghi, an Italian, is viewed with widespread distrust for pursuing policies perceived to be fast and loose. Germans have long looked to the Bundesbank as a pillar of stability and guarantor of a stable currency.

The Bundesbank's struggle to cope with its reduced influence after the introduction of the euro has been further frustrated by the ECB's policy response to the eurozone crisis. "At a European level, what policy decisions can the board take? None. And people (in the bank) know that", one employee said. "People are waiting for a new mission."

However hard he finds it to influence ECB policy, Weidmann has no intention of following his predecessor's example and resigning. He believes he is better off staying in the room and exercising influence rather than sniping from the outside. But Weidmann's job is much more difficult than that of his predecessors, said Clemens Fuest, head of the ZEW economic institute and an academic adviser to the government in Berlin who Weidmann sometimes consults.

One example of the still powerful and determined position of the Bundesbank was demonstrated in March of this year, when it used an accounting ploy to ram home to Berlin its concern that governments are pushing too much of the burden for dealing with the eurozone crisis onto the ECB. Presenting its 2012 results, the Bundesbank almost doubled its risk provisions due to what it saw as risky ECB policies to which it is exposed. The upshot was a much smaller transfer of Bundesbank profits to the German government than Berlin expected. 

"He doesn't want to let the governments off the hook", said Fuest. Instead, he wants to focus on the core business of price stability. This explains Weidmann's readiness to accept the May interest rate cut, but limit it, while reining in the ECB's ambitions in so-called 'non-standard' policy areas, such as its endeavour to boost lending to small and mid-sized enterprises (SMEs). And his insistence is paying off. Draghi has shifted from saying the ECB is looking for a solution to the problem of SME lending to pushing the issue towards the European Investment Bank.

Last month, he went into battle with the ECB at Germany's Constitutional Court in a hearing into the ECB's role in Europe's crisis-fighting strategy. Countries wanting to tap the yet-to-be-used ECB plan to buy bonds - Outright Monetary Transactions (OMT) - that Draghi masterminded last summer must apply to a new bailout fund for an aid programme that would require reforms and deficit-cutting. Weidmann's opposition to the bond plan helped ensure that this condition was attached.

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