Bundesbank leader criticises ECB euro zone rescue programme

Someone tell Labour: not even Frankfurt's way is Frankfurt's any more. That, at least, is the scalding verdict of Bundesbank president Jens Weidmann as regards the European Central Bank.

At regular intervals during his two-year tenure in the German central bank, Mr Weidmann has let off steam about the other central bank across town. Now the hawkish former economic adviser to German chancellor Angela Merkel has put his imprimatur on a 29-page report to Germany's constitutional court.

It warns that the ECB could have compromised its political independence with its policy of buying up debt of dubious quality from euro crisis countries.

The ECB's "outright monetary transactions" (OMT) programme to buy up bonds on secondary markets and stabilise the euro zone was unveiled in September and, even without being activated, has calmed financial markets.

Disturbances
The ECB unveiled the policy because it was concerned that the crisis had caused disturbances in the euro zone's so-called "transmission mechanism" – in other words that interest-rate cuts were not having their desired effect because they were not finding their way into the real economy.

But the ECB’s older Frankfurt neighbour complains in its report that this analysis is based on “strongly subjective elements” in assessing the efficacy of the transmission mechanism.

Even if the Bundesbank agreed that this channel was blocked, "the question arises as to whether and why such a development must be corrected". The 29-page Bundesbank report, dated December 21st and published in excerpt by the Handelsblatt newspaper last week, expands an oft-heard complaint by Mr Weidmann and his bank.

They are convinced that the ECB, by acting regularly to calm choppy waters in the euro zone, is undermining its mandate of monetary stability.

It has taken pressure off European leaders to act and, at worst, could become beholden to them.

The notion of a politically dependent central bank is anathema to postwar German monetary policy and Mr Weidmann appears determined that the constitutional court should consider this.

Potential losses
The ECB has not bought any bonds yet under the OMT but, if it did, the Bundesbank warns their poor quality would eventually increase risks for the ECB and potential losses for euro zone taxpayers.

Finally, the Bundesbank takes a swipe at the ECB's looser collateral requirements, another crisis move, and the risk to Germany posed by imbalances in the euro zone's internal payment system, known as "Target2".

The Bundesbank report is one of many documents being studied by the red-robed Karlsruhe judges before they announce their final verdict on the European Stability Mechanism bailout fund in June.

In a preliminary ruling, the German judges indicated it was highly likely that the €500 billion fund was in line with German constitutional provisions. But Mr Weidmann’s report has divided legal opinion in Germany on what to expect in two months’ time.

Some court watchers believe Germany’s highest court will wash its hands of Mr Weidmann’s concerns, ruling it has no remit to rule on monetary matters at the ECB.

Others suggest that, even if they did consider the issue, they would decide that the ECB’s OMT programme is in line with the bank’s mandate.

But others suggest the court might throw a spanner in the ESM works and ask the European Court of Justice to have a closer look.

This might happen if the judges decide the OMT programme lifts more sovereignty out of German parliamentarian hands than the postwar constitution allows.

It would be interesting to know what Mr Weidmann thinks of the remarks of his former boss, Angela Merkel, this week. In a rare sally into monetary affairs, the German leader told German bankers it was clear the ECB was doomed to pursue a one-size-fits-none interest rate policy. “The ECB is in a difficult situation,” she said. “It would probably have to increase interest rates for Germany a bit.”

For other euro members, the Frankfurt bank actually needed to move in the opposite direction on interest rates and “do more to make sure that liquidity is available to firms”.

Her spokesman moved quickly yesterday, saying there was “no reason to assume the chancellor meant to give any kind of warning or suggestion to the ECB in her speech”. Perhaps not.

But maybe Mr Weidmann already has his pen out to write another letter of complaint about his former boss.