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.

The European Central Bank’s President, Jean-Claude Trichet, has torpedoed a request for a new 30 euro banknote, backing up the rejection with ice-cold historical and mathematical reasoning.

European Parliament member and former Irish deputy finance minister Jim Higgins had asked Sharon Bowles, chairwoman of the parliament’s Committee on Economic and Monetary Affairs, whether a 30 euro note could be introduced.

She passed the question on to Trichet, but instead of dismissing the question out of hand, the ECB boss answered the question with a typically analytical approach.

“The ECB’s predecessor decided on a sequence of 1:2:5 for the seven euro banknote denominations, 10 and 100; 20 and 200; and 5, 50 and 500,” Trichet wrote to Higgins.

“This sequence is in line with the common denominational split of most of the world’s currencies and also corresponds to the sequence of the euro coins.”

He even went on to give examples of more unusual currency patterns, although by overlooking that Tunisia has a 30 dinar note, he may have exposed a hole in his knowledge.

“Some countries use or have used a sequence of 1:2.5:5. This was the case in the Netherlands in the pre-euro days of the guilder. However, to our knowledge, no country uses 3:30:300, etc. as a denominational sequence.”

“The ECB’s approach towards the denominational split of the euro banknotes has not changed. The ECB has thus not considered issuing a 30 euro banknote,” he concluded.

The Venice backdrop may have warranted some high Italian Opera but financial markets appeared to be humming to the sound of Irish crooner Ronan Keating during the European Central Bank’s latest monthly news conference.

Keating sang the chart-topping hit with the line “You say it best when you say nothing at all” in 1999, the year the ECB was established.

 FX and bond markets appeared to concur as ECB President Jean-Claude Trichet and his Italian colleague Mario Draghi gave their latest assessment on the state of the euro zone economy on Thursday, after the central bank kept interest rates at their current all-time low of 1 percent.

There wasn’t much new in it. The recovery from the crisis will be slow and subdued and the economic road ahead is likely to be scattered with potholes, Trichet said, keeping very much to last month’s line.

So markets began focusing on what Trichet wasn’t saying. A lack of conviction on the recent rise of the euro put the wind up currency markets and pushed the single currency up further, while a sanguine message on inflation appeared not to be what bond markets were expecting, sending euro zone government bond futures to a contract high.

Maybe markets may well have got Keating’s greatest hits on their playlist. Another of his tunes was called Rollercoaster, something plenty of traders must have been singing in the shower over the last couple of years.

Bankers worried about losing their bonuses might be well advised to consider a cost-benefit analysis of the contribution of their public sector colleagues.

Central bankers not only earn much less than their high-flying private sector counterparts, but over the last year have spent almost every second weekend in high-level, save-the-world meetings aimed at clearing up the mess created by Wall St and City banks.     

European Central Bank head Jean-Claude Trichet (who earns a mere 350,000 euros a year ) confessed to a group of student journalists that he spends almost every weekend working.

“My week often consists of seven working days, because we always have international meetings during the weekends,” he was quoted as saying by Germany’s Frankfurter Neue Presse. 

Trichet spent last weekend, for example, at the G20 meeting in London followed by a meeting of central bankers and regulators in Basel to thrash out a new framework for bank regulation.

One of the proposals: supervisors should make sure banks ”limit excessive dividend payments, share buybacks and compensation.”

Central bankers in the euro zone will have to get out their dictionaries and calculators to work out how often they are entitled to vote on European Central Bank decisions under a complicated new voting system.

New rules show that the size of a country’s economy, the health of its banking sector and the spelling of its name will all influence how often a governor from one of the euro zone’s national central banks gets to vote on setting ECB interest rates and other crucial policy decisions.

This could make the difference between a governor from a similar-sized economy being sidelined for as little as six months in a three-year period or as many as nine.

The system, set to kick in after three more countries adopt the euro, involves up to four groups of central bankers sharing differing numbers of votes. Votes will rotate every month, compared to the 12-month rotation seen at the U.S. Fed, and the complexity of the rules is mind-boggling.

 ”The Governing Council has decided that the number of governors gaining voting rights at the start of each month will be equal to the difference between the number of governors allocated to the group and the number of voting rights assigned to it, minus two,” the ECB said in its explanation of how it had decided on the rotation rate.

Coloured charts handily included with the announcement make the process somewhat easier to follow for the mathematically-challenged.

Currently there are 16 countries in the euro zone, and the new system is not set to kick in until membership hits 19. So given euro scepticism and budget woes in eastern Europe, policymakers are likely to have five more years to do the math before the test comes.

Central bankers have not had much reason to be happy over the last two years, as the financial crisis has lurched from bad to worse.

But the European Central Bank at least is now finding comfort in the fruits of its injection of close to half a trillion euros in 12-month funds last week, which has pushed money market interest rates to new record lows. 

“We are very happy, we see clearly that we decreased the risk premia,” ECB President Jean-Claude Trichet said on Thursday, after the ECB kept its benchmark rate on hold at 1 percent.

Still, the ECB’s generosity in filling bank coffers with cheap cash could paradoxically help financial institutions defer the day of reckoning when they will have to write down bad loans and toxic assets on their books, and adjust their balance sheets. Flush with ECB cash, banks could be encouraged to think they can hang on to past investment mistakes, rather than writing them down now. 

The Swiss-based Bank for International Settlements, a forum for the world’s central banks, says this painful process is a prerequisite for financial and economic recovery, and the International Monetary Fund  says the euro zone is lagging the United States in writedowns.

Maybe the ECB is not helping.

Just a week after warning that euro zone banks will probably have to write off another $280 billion in bad loans and toxic assets over the next 18 months, the European Central Bank has ridden to their rescue by pouring more than double that amount into bank coffers at a bargain-basement rate of just 1 percent.

More than a thousand banks rushed to take up the ECB’s limited-time-only offer of unlimited funds for one year at a fixed interest rate, and will receive a total of 442 billion euros, or $613 billion – the most the ECB has ever lent out in a single operation. 

“We are drowning in money,” a trader at one euro-zone bank said. Goldman Sachs estimated the funds equate to 1,300 euros per man, woman and child in the 16-nation region. 

The central bank is hoping banks will lend the funds on to those men, women and children, as well as other banks and businesses, to bring down the cost of money, encourage spending and shake the region out of a persistent recession.  Money market rates have already fallen to record lows as the ECB has slashed its interest rates, but longer-term liquidity is still scant.

The ECB’s efforts will come to nothing if banks sit on the cash instead of lending it on, or fail to spark consumer demand for credit - so the ECB is betting that spend, spend, spend will light the way out of the downturn.

The European Central Bank’s decision to buy up covered bonds is one in the eye for the Bundesbank’s Axel Weber.

Alongside fellow German Juergen Stark, he had led a campaign urging his colleagues to shun the current craze among central banks of effectively printing money by buying up debt or loans from their holders, banks. Unfortunately for him, they didn’t agree.

But while he may have lost the war, he certainly scored a substantial victory for his country during the battle. Covered bonds – bonds backed by mortgage loans or public debt - originated in Germany and the country’s banks still dominate the market, meaning they are likely to benefit the most.

“He was not one of the winners yesterday, but it’s a nice loss, let’s put it that way,” said UniCredit euro zone economist Aurelio Maccario. “I think in exchange to have the Bundesbank on board, they have chosen to buy covered bonds which are financial assets from the German banking system.”

ECB watchers speculate that Weber is one of the frontrunners to replace Jean-Claude Trichet in the ECB top job when his term expires in 2011.

The defeat over asset purchases is unlikely to have helped his election chances, but in what may turn out to be strange twist of fate, the ECB has revealed Trichet’s last meeting in charge, on October 6, 2011, will be hosted by the Bundesbank in Germany’s capital Berlin.

The European Central Bank has cut interest rates to a record low of 1.5 percent and although it’s expected to cut further to 1 percent by mid-year, this still means benchmark borrowing costs in the euro zone will be higher than the UK, the US, Canada and Switzerland, where official rates are already at 0.5 percent or lower.

But euro zone residents are actually enjoying more favourable credit conditions than the ECB’s “official” rate, the main refinancing rate, would suggest. 

 The Commerzbank branch opposite the ECB’s Frankfurt headquarters is offering mortages at a five-year fixed rate of just over 3.5 percent,  two percentage points cheaper than the average cost just a few months ago.  This is partly because the ECB, in addition to cutting rates, has flooded money markets with liquidity, meaning banks can borrow money amongst themselves more cheaply than the official benchmark rate.

  Economists I’ve spoken to in the last few months have dubbed this a de facto zero interest rate policy, or ZIRP by stealth.

Average overnight interest rates or EONIA, which would normally track the main refi rate, have fallen steadily in the last few months arnd are down to below 0.9 percent, while Euribor three-month market rates are around 1.6 percent.

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Even ECB policymakers such as arch-hawk Axel Weber say that the ECB’s overnight deposit rate, which is set one percentage point lower than the refi rate at 0.5 percent, has taken over the role as the floor for money markets, while the refi rate is acting as a ceiling.

One more 0.50 percentage point rate cut could take this rate down to zero, putting money market rates on a par with those in other regions while still allowing the ECB to keep to the moral high ground and argue that it is keeping up its guard against future asset price bubbles and inflationary pressures.

“If they go to 1 percent for the refi and put the deposit rate at zero, it means we would have an overnight money market rate at 0.2-0.3 percent, which would be for all intents and purposes a zero monetary policy,” Bank of America Merril Lynch economist Gilles Moec said.

The European Central Bank has to cut official interest rates by at least another percentage point to stop the real cost of borrowing for households and firms jumping in the summer as inflation plummets.

That’s the logical conclusion of comments in recent weeks made by ECB policymakers including Italy’s Mario Draghi and Germany’s Axel Weber, who are watching inflation-adjusted borrowing costs closely to gauge the impact of cuts in official interest rates on the real economy.

One key factor in the euro zone’s economic recovery will be the real cost of borrowing, the interest rate paid on credit after adjusting for inflation, or any loss of purchasing power.

Although there is a long academic debate about how to calculate this, several policymakers have done a simple equation of taking annual inflation (1.1 percent in January) away from the current benchmark interest rate (2.0 percent) to arrive at an estimate of the real cost of borrowing of just under 1 percent.

“In the euro area the real short-term rate is now below 1 per cent; if official rates had not been cut, it would have risen considerably because of the fall in inflation,” Draghi said in a speech in Milan on Feb. 21. “The Governing Council is keeping a close watch on the real cost of money.”

The catch to this argument is that euro zone inflation is expected to fall to zero or lower in the middle of the year, which will push real borrowing costs up unless the ECB slashes official rates by an equivalent amount. If it keeps its refi rate at 2.0 percent, the real rate would also be 2 percent — or double the level it is now.

Economists fully expect the ECB to cut rates to 1.0 percent by the middle of the year, given the dismal outlook for growth as well as very low inflation. But they warn that the real rates argument could backfire on the ECB, which is already under fire for not having cut interest rates as aggressively as its peers in other countries, given inflation is expected to rise again in the second half of the year.

“Does that mean they would follow through by raising rates to compensate? That’s why I think they should be very cautious in using this argument,” said Deutsche Bank economist Mark Wall.