The powerful head of Germany’s Bundesbank has issued a stern warning to the European Central Bank to stick to its inflation-fighting mandate, signalling that he will oppose efforts to broaden its role to tackle the euro zone’s debt crisis.
The Bundesbank has been appalled by the ECB’s interventions in the government bond market, its costly efforts to prop up ailing banks, and the enormous expansion of its balance sheet, arguing that the central bank risks becoming a tool for the direct financing of government budgets.
The ECB must guard its independence from political interference, Bundesbank president Jens Weidmann said in a published interview. “Furthermore, it should be aware that this independence also requires it to respect and not overstep its own mandate.”
The interview with Mr. Weidmann and a predecessor, Helmut Schlesinger, who ran the Bundesbank in the early 1990s, was conducted at the end of June for the ECB’s in-house magazine. It was translated into English and posted on the bank’s website Wednesday, just a day before a crucial gathering of the ECB’s governing council and a day after a meeting between Mr. Weidmann and ECB President Mario Draghi.
Mr. Draghi declared publicly last week, “The ECB is ready to do whatever it takes to preserve the euro,” as long as it falls within the bank’s mandate. But his interpretation of that mandate is much broader than anything conceived by Mr. Weidmann.
Their divergent views about the ECB’s function and powers reflect a serious split on the bank’s governing council that partly mirrors the north-south fiscal and economic gulf in the euro zone and makes it unlikely that the bank will make any bold moves at Thursday’s meeting.
Mr. Weidmann pointedly noted that although the Bundesbank holds only a single vote on the council, it has a large influence on it. Before the crisis worsened, the Frankfurt-based ECB was largely seen by critics as a tool of Bundesbank policy.
“I certainly would not say that we are ‘just’ one of 17 central banks,” Mr. Weidmann said in the June interview. “We are the largest and most important central bank in the euro system and we have a greater say than many other central banks in the euro system. This means that we have a different role.”
Mr. Draghi’s remarks last week appeared to signal that he would seek unlimited capacity to stabilize Spanish and Italian bond yields, shore up the banking system and deal with the worsening regional economy.
But any shift by the ECB toward a more Federal Reserve-like role in the crisis – as French, Italian and Spanish leaders have been urging – is simply not in the cards, analysts said.
“I don’t think this will happen [Thursday], because it would be a huge defeat for Weidmann,” said Kurt Huebner, professor of European Studies at the University of British Columbia. “This is exactly what they want to avoid. For the Bundesbank, it would be a success if [the ECB governing council] only restart what they did in the past.”
That means the ECB could get the green light to resume purchases of troubled Spanish and Italian bonds in the secondary market, which it suspended in March. But it will probably not cut interest rates further or launch more aggressive quantitative easing measures, despite deteriorating economic conditions.
The markets, which have already priced in the brief euphoria stemming from Mr. Draghi’s comments and encouraging words this week from Italian Prime Minister Mario Monti, are bound to react harshly if the ECB largely sits on its hands.
Since Mr. Draghi took the helm at the central bank last fall, it has cut interest rates three times, opened the long-term credit taps to the banks and bought billions of euros worth of government bonds in a failed effort to stabilize the market.