Business

Saturday 29 April 2017

Merkel's field marshal

A previously little-known economist will play a major role in determining the fate of the single currency

Jens Weidmann. Photo: Reuters
Jens Weidmann. Photo: Reuters

Jens Weidmann's appointment as head of the Bundesbank transforms the previously little-known economist into the most powerful central banker in Europe.

With the eurozone under pressure as never before, Weidmann is set to play a major role in determining the single currency's future.

While each of the national central banks of the 17 members of the eurozone are theoretically equal, some of them are more equal than others. Within the European Central Bank it is the German central bank, the mighty Bundesbank, which generally calls the shots.

Indeed, until the creation of the euro at the beginning of 1999, the Bundesbank effectively was the European central bank, setting the interest rates that all other members of the EMS, the precursor to the eurozone, were in practice obliged to follow.

In the furious haggling that preceded the creation of the euro, a project that never found favour with the German public who would much preferred to have retained their beloved D-mark, the German government only agreed to the new currency on the condition that the new European Central Bank was modelled on the Bundesbank.

Virtual clone

This is precisely what happened, with the new ECB being a virtual clone of the German central bank -- a politically independent organisation dedicated to keeping inflation low and the exchange rate high.

However, Germany was unable to secure sufficient support among other eurozone member countries for the appointment of then-Bundesbank president Ernst Welteke as ECB president.

Instead, in a messy compromise, Dutch central bank governor Wim Duisenberg, a sort of German surrogate, became the first president of the ECB.

He was succeeded in 2003 by Jean-Claude Trichet of France, whose eight-year term expires at the end of October of this year.

Axel Weber's decision not to seek reappointment to the Bundesbank when his current term ends in April has been interpreted in some circles as clearing the path to his being appointed Trichet's successor as ECB president later this year.

In practice this is unlikely to happen. With the post-2007 global financial crisis having exposed a dangerous fault-line between the eurozone core and the peripheral countries, the chances of European leaders agreeing to the appointment of the dogmatic Weber must be considered remote.

Even if other European nations could somehow be cajoled into accepting Weber as ECB president, the changing make-up of the ECB's council, which sets eurozone interest rates, argues against making such an appointment.

When the euro began life in 1999, the new currency had just 11 members. With the six members of the ECB's executive board as well as the head of each national central bank having a vote on the ECB council, it was relatively easy for Germany to control the newly formed organisation in its early years when the council had just 17 members.

As the members of the executive board were already on-side, Germany only needed the votes of two other countries in order to secure an ECB council majority.

That situation has gradually changed as more countries have joined the euro. There are now 17 members of the eurozone. This means that, in order to secure a majority on the council, Germany now needs five other countries' votes.

The worsening eurozone financial crisis has also made ECB council members from the weaker economies far less willing to accept the status quo, with Cypriot central bank governor Athanasios Orphanides reputed to be particularly vocal in his opposition to German claims of pre-eminence.

Now that its virtually guaranteed majority on the ECB council has disappeared, Germany has to tread more delicately. A Weber presidency of the ECB would almost certainly prove counter-productive.

Far more likely is that Germany will instead end up backing the appointment of a pliant Finnish, Dutch or Austrian central banker.

Which is where Weidmann enters the picture. Even if Germany is denied the ECB presidency, there is still no doubt but that the Bundesbank president is still very much first among equals on the council.

As the representative of Europe's largest and healthiest economy, his views will carry enormous weight at the ECB.

With Greece and Ireland having been already forced to seek bailouts from the European Financial Stability Facility and Portugal likely to follow suit shortly, it is now crystal clear that there are severe flaws in the eurozone's architecture.

Those who warned that a monetary union, single currency and interest rates, without fiscal union, combined taxes and exchequer, was courting disaster have been proved correct.

While Germany ruthlessly squeezed its costs during the early years of the euro, the so-called PIIGS, Portugal, Italy, Ireland, Greece and Spain, partied like there was no tomorrow.

The PIIGS binged on the tidal wave of cheap credit that the euro made possible and ignored the likely consequences. Now that the party is over it is Germany that will have to clean up the resulting mess if the euro is to survive.

That may prove a bigger "if" than most people realise. After having taken the pain of lower wages, higher taxes and later retirement, German voters are rightly angry that is they, and not the spendthrift Irish, Greeks and Portuguese, who are now expected to pick up the tab for the PIIGS' excesses.

Unfortunately, the euro is at least as much a political as an economic construct. This means that if the euro fails then the consequences will be at least as much political as economic. It is not inconceivable that the collapse of the euro could result in the collapse of the entire European "project", the centrepiece of German foreign policy since the end of World War Two.

It will be a large part of Weidmann's job to ensure that this doesn't happen. While Germany will inevitably end up paying the lion's share of any eurozone restructuring, Weidmann will press hard to ensure that, in return, the PIIGS adopt the fiscal and economic reforms necessary to ensure that nothing like this ever happens again.

Easier said than done. The violent protests which greeted the Greek government's plans to raise that country's retirement age from 61 to 63 are a clear signal that the citizens of the PIIGS will not accept German-style reforms without a fight.

And it isn't just the Greeks who could prove to be awkward customers. With Irish welfare payments at more than twice German levels, how long will Germany be willing to subsidise such generosity?

Quite clearly forcing through these changes is a task which will require a unique combination of diplomatic tact and steely resolve.

Can Weidmann deliver? A close associate of German Chancellor Angela Merkel, he has served as her adviser on international economic affairs, being closely involved with both the G-8 and G-20 groups, since 2006. He was previously with the Bundesbank from 2003 to 2006 and before that served stints with the IMF and the German Council of Economic Experts, which advises the German government and parliament on economic issues.

Partly educated in France and having received some of his training in the Banque de France, he is also very highly thought of in French official circles.

With his soft-spoken, affable manner he is likely to prove to be far more effective at advancing German interests within the ECB and the wider eurozone than Weber, who is sometimes reputed to resort to table-thumping to emphasise his point, ever was.

Irish Independent

Promoted articles

Also in Business