Diplomacy not needed for top ECB job, says Bundesbank boss
Axel Weber, head of Germany’s Bundesbank and a frontrunner to take over the leadership of the European Central Bank next year, thinks diplomacy is over-rated in central bankers.
Weber normally avoids all comment on the tricky subject of choosing a successor to current ECB President Jean-Claude Trichet but with just over a year to go before the plum post comes up, could not resist making an ambit claim.
Asked by a television interviewer whether he was enough of a diplomat to take over from Trichet given his public criticism of the ECB’s decision to buy government bonds in May, Weber said he thought diplomacy was an optional extra.
“I’t's important to be diplomatic for the diplomatic corps; it’s not so important for the central bank,” he said.
“I think it’s very important for central banks to have a strong view, to basically stand for that view … that sometimes requires (putting) diplomacy in the back seat.”
Weber’s main competition for the top job, Italy’s Mario Draghi, is is no stranger to diplomacy as head of the Financial Stability Board of international regulators and is seen as more moderate than the anti-inflation Weber.
Interesting that Weber’s comments came during an interview in which he backed extending the ECB’s ultra-generous liquidity supplies into the start of next year, surprising many observers who had expected him to take a hard-line stance.
ECB stuck feeding southern Europe’s cash addiction
Commercial banks in southern Europe are increasingly addicted to cheap central bank money after dealers shut them out of money markets. Due to this dependency, the European Central Bank will have little option but to keep offering banks cold hard cash for almost nothing – currently it prices its loans at 1.0 percent.
Economic growth in the euro-zone core has been robust lately, but southern Europe has been hit hard on several fronts recently and is falling badly behind. First, the sovereign debt crisis hit Greece and other southern periphery countries, then bank stress tests showed 6 out of 7 failing banks were in Spain or Greece, and then the region posted only tepid economic growth.
Bank borrowing from the ECB shows increasing strains in southern euro-zone’s financial sector while banks elsewhere are getting back on their feet, but the fear of contagion from country to country will keep the ECB on its toes. Banks in Greece borrowed twice as much last month as they did in July 2009, even though outstanding central bank lending fell 18 percent over the same time. Banks in Portugal borrowed five times as much in July 2010 as they did a year earlier, and borrowing also rose in Spain and Italy.
“The full-allotment fixed-rate repos will stay well into next year,” said Michala Marcussen, Societe General chief economist. “Beyond the first quarter of next year, the overall economic environment will be the key determinant in how much longer it gets carried. In all likelihood it could get carried further ahead.”
The ECB tried to reintroduce limits to borrowing in April but was forced into a U-turn by the sovereign debt crisis, returning to its full allotment policy in May. Fourth-quarter plans are due to be revealed in September, with markets expecting full allotment to continue.
Among the ECB’s 22 Governing Council members, Cyprus’s Athanasios Orphanides and Ireland’s Patrick Honohan have indicated the unlimited funding should continue, and on Friday Germany’s Axel Weber made clear exit discussions should not resume until early next year. His dovish tone got analysts’ attention.
Walking, talking ECB leading indicator
German Bundesbank President Axel Weber is developing a reputation as a leading indicator for the European Central Bank.
In the same way as a pickup in confidence can foreshadow a pickup in the economy, Weber’s comments about the direction of ECB policy this year have tended to be borne out by events.
The ECB’s broad hint on Nov. 5 that it will drop its super-long, one-year loans to euro zone banks next year follows a similar suggestion by Weber a week earlier.
And earlier this year, the 52-year-old publicly argued (and succeeded) for the ECB not to cut its main interest rate below zero, or follow other central banks in adopting a massive asset-buying programme.
Some economists wonder whether Weber – seen along with Italy’s Mario Draghi as an heir apparent to ECB President Jean-Claude Trichet in 2011– just dares to say publicly what others are already thinking, showing little regard for the unwritten rules that make Trichet the official barometer of ECB opinion.
But others say Weber’s record this year shows he is successful at convincing others to follow his lead. A former academic, he can talk eloquently about the nitty-gritty of economic analysis and as the representative of the euro zone’s biggest economy and banking sector, his opinion carries weight.
“When Weber speaks, the market does tend to listen,” says Societe Generale economist James Nixon, a former ECB staffer.
