The future of the euro and maybe of the European Union itself will turn in the next few weeks on a disagreement between Mario Draghi, president of the European Central Bank, and Jens Weidmann, head of the Bundesbank. Draghi wants the ECB to do “whatever it takes” to preserve the single currency. Weidmann doesn’t.
A question arises: How did the Bundesbank, representing just one nation among the 17 members of the euro area, ever acquire the veto over ECB policy it is apparently allowed to wield?
There are two main answers. First, when the Bundesbank ruled the roost as Germany’s central bank, its reputation was peerless. In some ways the ECB was modelled on it, and the habit of deference persists. But while the Bundesbank still calls itself a central bank, its role now is to serve as a regional office of the ECB.
Second, Germany is the biggest economy in the euro area. But so what? Votes on the ECB’s governing council are distributed not by shares of euro-area gross domestic product or ECB capital. The ECB was purposely designed so that every country in the system sends a member to the council; each of those members has one vote.
Germany doesn’t actually have a veto; it just talks as though it does, and the rest of the council usually goes along. Don’t be fooled; Germany understands the limit of its power. Some of its politicians have started complaining about it, saying it’s wrong that Malta has as much voting power as Germany and the rules should be changed. They are worried that Germany’s minority view on the council might soon be voted down.
Buying Bonds
It has happened before: Axel Weber, a previous Bundesbank president, was outvoted when the ECB decided to buy Greek bonds before resigning early last year. This is how it should be. Minority views on bodies like the council are supposed to be voted down.
You might sympathise with the view from Berlin until you understand that one-man, one-vote was deliberately written into the ECB’s architecture to prevent what has arisen — policy guided by national interest, rather than by the interests of Europe as a whole.
The design, which Germany had a disproportionate say in drawing up, aimed to suppress the very idea of national representatives, which weighted votes would have affirmed. At Germany’s insistence, Weidmann’s job under ECB rules is not to represent Germany. It’s the same as Draghi’s - to represent Europe.
Weidmann, to be sure, could plausibly say that’s exactly what he’s doing. We’ve been making the case for months that the ECB should act as a lender of last resort by standing behind distressed but solvent sovereign borrowers, and should squelch any doubts that may arise about the system’s integrity. We can see that the case isn’t open and shut; intervention on the needed scale does create moral hazard, as Weidmann has said, and how far you can control it is open to debate.
Yet the case against a lender-of-last-resort role for the ECB is increasingly being cast in terms of national interests. You can see why. Measures to help Europe’s distressed governments are increasingly unpopular in Germany. And whatever the rules say, Germany has the power that comes from knowing the euro system needs Germany rather more than it needs Greece.
Even so, it’s wrong to let those points play so prominent a role, and not just because the ECB’s job isn’t to balance national interests. It’s also wrong because it undermines confidence in the euro project itself. Once the ECB engages, or is seen to engage, with the question of who gets helped and at whose expense, the entire notion of monetary union is called into question.
After Draghi’s August 2 promise to defend the euro by any means necessary, German Chancellor Angela Merkel and Finance Minister Wolfgang Schaeuble expressed agreement - admittedly, not in the clearest terms. (Schauble said he would support stronger ECB action “within its mandate.”) In subsequent comments, both have offered the Bundesbank sufficient cover to soften its line.
Right now, though, Weidmann may be more closely aligned with German public opinion than Germany’s elected leaders, a strange position for a central banker to be in and, under present circumstances, an unhealthy one. In our view, the Bundesbank is wrong on the merits about the right way to support the euro system. Whatever their views on that, however, Europe’s central bankers should think back to the founding of the euro and remember how monetary policy in a genuine union is supposed to be run.
Since credibility is all, the survival of the system must not be kept perpetually in doubt. And as Germany once insisted, the key to central-bank credibility is political independence. Weidmann must make it clear that he is more concerned about Europe than Germany. That goes with the job. And if need be, the rest of the council must be willing to overrule him. That goes with the job, too.
