No Doves Cry as Weidmann Flies the Central Bank Coop
(Bloomberg Opinion) -- After a decade at the helm of the German Bundesbank, Jens Weidmann surprised everyone with his resignation on Wednesday. Being in charge of the most important national central bank in the European Union is no longer quite what it was. He follows in a long line of Bundesbankers who quit in frustration before their term ended.
The message is crystal clear: the European Central Bank reigns supreme over its subordinate national central bank members. Even the once-mighty Bundesbank with its reputation as the euro area's most outspoken hawk is no match for the ECB's unremittingly dovish tack. Resistance has become increasingly futile.
Weidmann's political mentor, Angela Merkel, is also shuffling off the scene shortly. He was a top adviser to her for five years before he was parachuted into one of the top spots in central banking. With his political connections and a doctorate in European monetary policy, Weidmann was expected gravitate eventually to the pinnacle of the ECB. It would have been indelicate for someone from Germany — Europe’s biggest economy — to run the EU’s most important financial institution. But there could have been a first time, certainly Weidmann restrained his hawkishness when it looked as if he might be in with a chance for the top job.
But then Christine Lagarde replaced the highly-respected Mario Draghi in late 2019 for an eight-year term. The politically ambitious, monetary hawk found himself in a parliament of doves.
His fellow hawks on the ECB’s governing council have been turned mute by seismic changes. In response to the pandemic, the European union has seized on combined monetary and fiscal stimulus as the new path forward. Trying to rein in this unprecedented 1.85 trillion euro ($2.15 trillion) bandwagon has been a task for the hawks. For Weidmann — an oft-quoted sceptic on quantitative easing and how long it should persist — there is only so much patience for having your voice lost in the wind.
The Pandemic Emergency Purchase Program is due to expire in March but the markets fully expect it to live on, albeit modestly reduced and under another acronym. The debate currently rages ahead of the big decision due at the Dec. 16 ECB policy meeting. But Weidmann's departure is the strongest signal yet that the doves will prevail. The rest of the "frugal" euro area countries — the Netherlands, Austria and Finland — are not blessed with a central banker of the same stature.
The pre-Covid QE facility, Asset Purchase Program — or a more snappily-named replacement — will mostly likely inherit much of the flexibility embedded into the PEPP to ensure that there are proper defenses against the “gentlemen of the spread.” Proving that, contrary to Lagarde's most infamous misspeak, that the ECB really is here to close interest-rate spreads between peripheral countries such as Italy to the core of Germany and France.
Who will succeed him at the Bundesbank? Such decisions are in the hands of the next German government, which is still in the creative stage. A replacement hawk for hawk is less likely than a more consensual candidate. Claudia Buch is Weidmann’s deputy but she is a perceived Christian Democrat party (CDU) appointee. It is more likely Isabel Schnabel would step up as the next head, and she is a key ally of Lagarde. Although she has not had a major role with the Bundesbank, Schnabel was appointed to her ECB executive board role in 2020 by Social Democratic Party (SPD) leader Olaf Scholz, who is still finance minister. He is most likely to become Germany’s next chancellor. Schnabel would be a very pro-EU appointment.
Weidmann, who is 53, has lots of new roles to consider. It would be something of a shame, if he followed his predecessor Axel Weber's route from the Bundesbank into a senior role in banking, or indeed asset management. Still, it could be a lucrative sinecure while contemplating his next move.
The most promising remains politics. Weidmann is a viable candidate for finance minister in a future government led by the CDU. However, Merkel’s party will be out of office for a political cycle following the worst electoral performance in its history at last month's national elections. That road is not going to lead to instant rewards.
Until he figures it out, he can watch as the hawks of European central banks lose their fearsome talons. The QE express train stays very much on track. No doves crying here — only cooing.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Marcus Ashworth is a Bloomberg Opinion columnist covering European markets. He spent three decades in the banking industry, most recently as chief markets strategist at Haitong Securities in London.
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