As Europe’s top central banker, Mario Draghi knows how important — and difficult — it is to keep Germany on his side. That's why, at the height of the euro crisis in 2012, he turned on his Italian charm and invited Bundesbank chief Jens Weidmann for private schmoozing at the European Central Bank. It didn’t work: Germany’s top central banker was the lone dissenting vote among his European peers against Mr. Draghi’s plan to save the euro. “I’m sure no one expected me to change my mind because of a glass of wine and a bag of chips,” Mr. Weidmann deadpanned.
For many Europeans, Mr. Weidmann’s inflexibility showed a stereotypical German stubbornness in clinging to rules for their own sake. This German stance almost doomed the euro by keeping southern European economies in a stranglehold of austerity for the better part of a decade. It’s also why the idea of Mr. Weidmann replacing Mr. Draghi as ECB chief — a real possibility after 2019 — is the stuff of nightmares for many Europeans. But Weidmann as ECB president might not be as dogmatic as his critics fear.
The ECB already has much in common with the Bundesbank in Frankfurt. Founded in 1957, the Bundesbank came out of Germany’s Ordoliberal economic tradition, with a singular focus on keeping down inflation. It has always been fiercely independent from government, ranking it among the most trusted institutions in Germany. But what's good for Europe’s largest economy isn’t necessarily good for its neighbors. Critics accused the Bundesbank of ignoring the effects its interest-rate changes had on other European countries, which usually had to follow suit.
If Weidmann had been in charge, he would have told Europe's leaders to find their own solutions to the euro's mess.
That discontent is a big part of what led to the euro, first introduced in 1999: Non-Germans wanted to take back control of Europe’s monetary policy. To mollify the skeptical Germans into giving up their prized deutsche mark, the Bundesbank’s ideological traditions (the focus on inflation and independence from governments) were enshrined in the charter of the ECB.
Today, Germany is one of 19 euro members, and the Bundesbank is one of 19 national central banks that carry out the ECB’s orders. Mr. Weidmann is one of 25 central bankers sitting on the ECB’s rate-setting governing council. In a rotation system, some months Germany doesn’t get a vote at all.
This setup worked well in the early 2000s when the ECB was first run by a Dutch central banker, Wim Duisenberg, and later by the (surprisingly hawkish) French central banker Jean-Claude Trichet. Europeans were happy they had won back control, and Germans were happy that the ECB seemed to follow the Bundesbank’s conservative economic tradition. Even if the ECB didn’t have a German leader, it was heavily influenced by its first chief economist, Otmar Issing, a German national. Since 1999, the ECB has actually kept inflation lower than the Bundesbank.
But when Mr. Draghi took charge in 2011, the central bank’s character started to change, says Mr. Issing. In effect, it became less German and more southern European. Mr. Draghi had little choice. He took over in a time of crisis, and the threat of the euro zone’s collapse required him to help the economies in southern Europe.
Mr. Draghi famously promised in a speech in 2012 to do “whatever it takes” to safeguard the euro zone. This meant going beyond the ECB’s intended role of raising and lowering borrowing rates. Rather than simply buying debt across the currency bloc (a traditional tool used to lower rates), the ECB pledged also to buy an unlimited amount of government bonds from any individual euro zone member in trouble. The commitment was so credible that currency speculators gave up. The ECB has to this day not actually bought a single bond under this particular program.
Mr. Weidmann would have acted differently. If he had been in charge, he would have told Europe’s leaders to find their own solutions to the euro’s mess. He doesn’t care that Mr. Draghi’s promise actually worked. In the Bundesbank’s philosophy, the end did not justify the means: At best, a promise to buy bonds from debt-laden capitals blurred the lines between central banks and governments. At worst, it amounted to illegal government financing.
With Mr. Draghi in charge, southern pragmatism thus prevailed over Germanic Ordoliberalism. But Germans have looked askance at the ECB ever since. Rules exist for a reason, they think; bending them merely sows the seeds of the next crisis.
Mr. Weidmann would represent a more hawkish strand of monetary policy thought.
Though an ECB President Weidmann circa 2012 almost certainly would have meant a very different outcome of the euro crisis, a Weidmann presidency in 2019 is harder to gauge. The crisis has ebbed, and growth has returned. Euro-zone governments have set up other mechanisms to respond to another crisis. So the role of Mr. Draghi’s successor will probably be more traditional: stewarding the economy and completing the central bank’s exit from a series of less controversial measures (such as so-called “quantitative easing”) to lift the economy.
Mr. Weidmann would represent a more hawkish strand of monetary policy thought. This includes a laser-like focus on inflation and an aversion to the low interest rates and quantitative easing of the Draghi era. And yet, Mr. Weidmann is actually pragmatic by German standards. His background is in policy: Before leading the Bundesbank, he was a chief economic adviser to Chancellor Angela Merkel. Before that he worked at the International Monetary Fund.
Mr. Weidmann has certainly more been open to compromise than his predecessors at the Bundesbank were. And he has come to the ECB's defense when criticism in Germany goes out of bounds, reminding his compatriots that Germany is part of a team. Once chastened by actual power, this Ordoliberal German hawk may just turn out to coo like a Europhile dove.
Christopher Cermak is an editor with Handelsblatt Global in Berlin. He has previously covered monetary policy in Frankfurt and Washington, DC. To contact the author: [email protected]