Weidmann’s Litmus Test for ECB Presidency Is ‘Whatever It Takes’

(Bloomberg) -- If Jens Weidmann really wants to be president of the European Central Bank, he’ll probably have to settle the question of whether he accepts Mario Draghi’s defining legacy.

When Draghi pledged to do “whatever it takes” to save the euro during the 2012 debt crisis and followed up with an emergency bond-buying plan, the Bundesbank president was an outspoken opponent. He even testified against it in a challenge that was ultimately defeated in the European Union’s top court.

Seven years on, as EU leaders start to pick the next ECB chief, it may be time to publicly accept that the Outright Monetary Transactions program is legal and might one day be needed to haul a debt-laden country such as Italy out of a crisis.

“If Mr. Weidmann is chosen he will be immediately tested by the markets because of course it’s known that he opposed OMT,” Francesco Papadia, the ECB’s former director general of market operations, said in a Bloomberg Television interview. “The market will want to know whether he’s still in that opposition mode.”

Analysts at Evercore ISI and UBS Group have said selecting Weidmann would probably push the euro higher and widen bond spreads as investors bet on a more hawkish policy.

Under OMT, the ECB would buy a nation’s sovereign bonds to alleviate pressure on public finances in a debt crisis. In return, the government would sign up to a program of structural reforms. So far no country has requested it.

Weidmann has argued that the program is tantamount to monetary financing, which is illegal, and would harm the ECB’s credibility -- views welcomed in Germany where the fear is that Europe’s largest economy will be forced to bail out wasteful and inefficient euro-zone states.

He declined to comment further for this article but recent comments on quantitative easing, a later suite of bond-buying programs that he also dislikes, signaled one way he might twist his opinion while still saving face.

Open Minded

When 20,000 people turned out for the Bundesbank’s open day in Frankfurt to see officials grilled in question-and-answer sessions, Weidmann stayed away from “whatever it takes” and drew applause for being non-committal on how to respond to the next downturn.

Pressed on quantitative easing though, he noted that it has survived multiple legal challenges.

“There are many intelligent lawyers who have dealt with the question, both at the constitutional court and at the European Court of Justice, and every time they’ve concluded that the programs don’t go against the prohibition of monetary financing, so I don’t trust myself to make any different legal judgment.”

That stance opens the possibility of a similar argument on OMT -- it has side effects and it needs to be treated cautiously, but it is legal.

“This decision was taken and the ECB has to live with that,” former ECB chief economist Otmar Issing said this week. “He can’t undo what was decided in the past, and will certainly have no intentions.”

Bend It Like Becket

Weidmann has previously hinted that he would be different as ECB president than as Bundesbank president. Last year he cited the example of Thomas Becket, a 12th-century Englishman who was appointed as archbishop of Canterbury by his friend King Henry II, only to shift his allegiance to defending the church.

Becket’s about-face ultimately led to him being murdered by the king’s followers in Canterbury cathedral. The consequences for Weidmann won’t be that severe if he shifts his views in his new post, but he may well upset the German public, and he might have to accept that.

“There is quite a broad consensus that the OMT is a very useful instrument that may be needed to fight a self-fulfilling crisis, and Jens Weidmann would have to ask himself whether he can commit to that or not,” said Isabel Schnabel, who sits on a panel of economic advisers to Chancellor Angela Merkel. “If he can’t, he shouldn’t become the ECB president.”

--With assistance from Piotr Skolimowski, Ott Ummelas and Carolynn Look.

To contact the reporter on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net

To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Brian Swint, Fergal O'Brien

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