ANALYSIS:THE EURO zone crisis has prompted a new round of bedhopping between Berlin and Frankfurt's two central banks.
Days after Mario Draghi clarified his London promise to do “whatever it takes” to stabilise the currency, Berlin is ready to follow the European Central Bank’s pragmatic crisis strategy rather than the principled path of the Bundesbank across town.
After fulsome praise for Mr Draghi from German finance minister Wolfgang Schäuble last week, it was the turn yesterday of the spokesman of the holidaying chancellor. “The government has no doubts whatsoever that everything the European Central Bank is doing lies inside its mandate,” said Georg Streiter, government spokesman.
Such words are highly significant in Berlin, where politicians and their officials never make public, on-the-record comments about the ECB and its president.
“This is going quite far for us,” said a well-placed government official yesterday.
Berlin has been far less forthcoming on the Bundesbank and its president Jens Weidmann.
Breaking with ECB tradition last week, Mr Draghi named the 44-year-old Bundesbank president as the one reservation in an otherwise unanimous governing council vote in favour of seeking “guidance” on “modalities” to address “severe malfunctioning” in euro zone bond markets.
Behind the technical talk, Mr Draghi was indicating that the ECB would look into new ways to buy up bonds of struggling euro zone members – Spain and Italy at present. The strategy would be conditional enough to appease euro zone governments, he promised, yet effective enough to impress markets.
For 22 governing council members, the bond yields for Spanish and Italian bonds are “unacceptable”. For Mr Weidmann it is ECB bond-buying that is unacceptable, skirting dangerously close to monetary financing of states – a breach of ECB mandate – and increasing the risk of inflation.
High bond yields are, the Bundesbank argues, a market reflection of real problems and a useful incentive for reform. It points out that previous rounds of bond-buying drove interest rates down, at a cost of over €200 billion, only to see them rise shortly after.
Officially this logic is shared by Berlin. But a shift away from this position is increasingly palpable.
Dr Merkel gave her public backing for Mr Draghi’s “whatever it takes” strategy, distancing herself both from Mr Weidmann, her former economic adviser, and the post-war culture of currency stability of Bundesbank.
“Of course Weidmann is a different guy now and of course has to defend the Bundesbank legacy,” said a senior Berlin official. “But the position we’re taking now is more pragmatic.”
Mr Draghi insisted last week the Bundesbank chief was not “isolated” at the ECB. However sources inside the bank say Mr Draghi won over Bundesbank allies with a proposal to buy only short-term bonds – limiting the duration of ECB exposure to crisis countries – and by making a bailout application a prerequisite for intervention.
The compromise plan, with the aim of bringing in as many doubters as possible, was a group effort, headed by ECB executive board members Jörg Asmussen and Benoît Coeuré, with some political input from Berlin.
By naming Mr Weidmann at the post-meeting press conference, some ECB watchers suspect that Mr Draghi, for all his claims to the contrary, has isolated the Bundesbank chief and destroyed any chance of getting him on side in for any future bond-buying deal.
Bond-buying has a bad name in Germany, prompting the resignation of its two top ECB representatives, Jürgen Stark and Bundesbank president Axel Weber.
Berlin is still filled with bond-buying critics, even in cabinet, but not in Dr Merkel’s cabinet.
And the days of a united German front at the ECB appear to have passed.
German officials insisted yesterday that their profession of confidence in the ECB today does not mean Berlin’s backing tomorrow.
But playing favourites in public with Frankfurt central banks suggests that Berlin now accepts that the post-crisis ECB will no longer represent its Bundesbank model.
