'Mr. No' at Europe's Central Bank

'Mr. No' at Europe's Central Bank

By Sebastian Jost



The future of Europe depends mightily on the euro and the European Central Bank. Jens Weidmann is helping to set the direction.

By Sebastian Jost

“Herr Nein” — Jens Weidmann, president of the Deutsche Bundesbank — finally said ja (yes) and the relief showed plainly on the face of Mario Draghi, who heads the European Central Bank (ECB). “This time it was unanimous,” said Draghi as he presented a package of measures to combat extremely low inflation in Europe at the beginning of June. For this, he thanked each of his 23 colleagues in the bank’s powerful governing council.

He had good reason to be relieved. Unanimous decisions have been anything but normal at the Central Bank in the past years of eurozone crisis. And that’s mainly because of one man whose office is located just a few miles north of the ECB headquarters in Frankfurt: Jens Weidmann, who leads the largest and most influential national central bank in Europe.

While the decisions of the ECB are highly technical, they lie at the core of whether the European Union can succeed as a currency union, a political union, even as an effective global partner for the United States. Draghi has been trying to save the euro from collapse. Europe launched the currency in 1999 to great fanfare, but almost everyone now recognizes it was terribly flawed. It awkwardly lashed together economies across the continent that were moving at sharply different speeds, leading to a boom and bust cycle that has wrecked the economies of southern Europe. Yet now, undoing the unwieldy currency union could be even more painful than forging ahead in a flawed partnership.

Weidmann surprised all who saw him as a weak successor to the loud Weber. He quickly positioned himself as a champion of monetary orthodoxy.

Weidmann inherits the German tradition of monetary rectitude, of hypersensitivity about any possibility of inflation. He also reflects the public opinion of Germans who understand well that ECB efforts to help Europe’s weaker economies — Greece, Italy, Spain, Portugal — by lending money to banks or governments are borne directly or indirectly by Europe’s powerhouse economy: Germany. Why should they want to pay?

Last time around, Weidmann stood in Draghi’s way. In the summer of 2012, he was the only member of the council to vote against an unlimited government bond purchase program, called OMT, which Draghi had trotted out to dispel fears that the euro would collapse. The program strongly resembles the purchase of government bonds by the Federal Reserve Bank in Washington that many economists credit with saving the U.S. economy.

Weidmann, however, believed that with this move, the ECB was exceeding its mandate. Since then, the 46-year-old buttoned-down German has been regarded as a bitter adversary of the Italian, and as a lonely opponent to the pragmatic ECB boss.

Weidmann hardly looks like a troublemaker — with neatly parted hair and a polite smile, and always dressed in inconspicuous dark-blue suits. His voice is soft, his tone authoritative — Weidmann can lecture and argue, but never loudly. His hobbies are not known to be more exotic than gardening.

But he’s got a knack for trouble. Weidmann’s call last week for Italy to curb deficit spending brought a shart retort from Italian Prime Minister Matteo Renzi. “We should all bear in mind that Europe belongs to European citizens, not to bankers — neither Italian nor German bankers,” Renzi said.

Mario Draghi and Jens Weidmann standing smiling

Mario Draghi and Jens Weidmann

Source Getty

Weidmann looks more suitable for a role in the background, which he had until 2011. Following stops at the International Monetary Fund and the Federal Bank, as an economic adviser to German Chancellor Angela Merkel, he designed Germany’s response to the financial crisis, but never in the public eye. This changed quickly when former Bundesbank President Axel Weber resigned and Merkel sent her best man to Frankfurt. Suddenly, the thinker from the back office stood in the spotlight.

Weidmann surprised all who saw him as a weak successor to the loud Weber. He quickly positioned himself as a champion of monetary orthodoxy. His criticism of Draghi’s generous loans to Europe’s banks was initially subtler, but in the summer of 2012, he came into open conflict over the issue of bond purchases. Weidmann considered the ECB program a dangerous start of public financing by means of printing money and insisted it should be rejected, even when Draghi had convinced all the other skeptics in the ECB Council — including the German Chancellor — of his plan. Other central bankers may have gossiped about the isolated Weidmann, and Draghi ridiculed him for his alleged “Nein zu allem” — “No to everything” — but Weidmann stood his ground, giving one interview after the other in which he strongly criticized the bond program that financial markets celebrated.

With this, the president of the Bundesbank became a figurehead for all those who regarded the rescue of the European states in economic crisis as completely wrong, for those who feared that an increasing amount of German money might flow to the decrepit south of Europe. He became a hero for opponents of the euro itself, even though he supports it. At home he was applauded.

Draghi ridiculed him for his alleged ‘Nein zu allem’ — ‘No to everything’ — but Weidmann stood his ground.

Weidmann must have enjoyed this wave of popularity. But since the fall, he’s been defending a new offensive from the ECB against the crisis and is now even supporting negative interest rates, which are extremely unpopular in Germany. Germans are a nation of savers who prefer to put their money in secure bank accounts, which now earn almost nothing.

This is consistent for Weidmann. He opposed the purchase of government bonds because he believed it violated the mandate of the ECB. However, he is equally supportive of a battle against the threat of deflation, as long it uses orthodox means, including reductions in interest and loans to banks. 

This time, Draghi showed consideration for Weidmann and at the beginning of June was able to express his delight at a “very, very unusual level of consensus.” And the fact that Weidmann subsequently defended the low interest rates to complaining German savers.

Still, Draghi also knows that solidarity with Weidmann may not last. As soon as Draghi reaches for government bonds, “Herr Nein” will do his duty once again.