Bundesbank president Jens Weidmann has thrown an additional, intriguing wild card onto the negotiating table for Germany's post-Merkel government: his job.
After a decade in stoic opposition to the ECB’s loose monetary policy, the tall, hawkish 53 year-old economist announced his premature departure on Wednesday for “personal reasons”.
His close advisers say the main reason is the writing on the wall in Berlin.
Last month's election disaster for the centre-right Christian Democratic Union (CDU) means Dr Weidmann, former economic adviser to CDU chancellor Angela Merkel, sees himself out of step with any new Social Democrat-led government.
Among its election-winning promises, shared with its future Green coalition partner, were flexibility on two touchy financial issues in Germany. The first: a looser approach to Germany's constitutional debt brake mechanism, which – in its purest, pre-pandemic form – demands balanced budgets, limits borrowing and thus investment.
The second promise: SPD-Green flexibility on making EU-issued bonds a permanent feature, particularly for investment, though they were backed by chancellor Merkel strictly as a pandemic one-off.
If either or both of these campaign promises become government policy, it would bring Berlin into open conflict with the ostensibly independent Bundesbank president in Frankfurt. Given he has spent the last decade in opposition to the ECB’s majority-backed monetary policy, looking to the future in Berlin, Dr Weidmann felt he had run out of road.
“He’s in a structural minority position,” an aide told the Irish Times.
After signing up for a second, eight-year term in 2019 his premature departure from his €350,000 a year role has a long tradition in the brutalist Bundesbank headquarters, perched on a hill outside Frankfurt.
In 2004, Ernst Welteke resigned after it emerged he accepted free luxury hotel and yacht hospitality from BMW and Dresdner Bank. His successor Axel Weber walked out in a rage in 2011 when he realised that the Bundesbank's former authority had evaporated in the new currency union. As the euro crisis raged, he was repeatedly outvoted at the ECB governing council on unconventional crisis measures - including sovereign bond-buying.
That tension remained with Dr Weidmann – and was exacerbated when former ECB president Mario Draghi promised in 2012 to do "whatever it takes" to preserve the crisis-hit euro.
Dr Weidman opposed this move and argued that by intervening to buy state bonds the ECB was creating a vicious circle of dependence and expectation vis-à-vis euro member states and markets. Persisting with these measures, making the unconventional conventional, was a betrayal of the ECB’s political independence, he argued, and blurred its mandate to keep inflation around 3 per cent.
Four years ago, he warned in The Irish Times that the ECB must “make a clean breast” of its expansionary exit to dispel crisis-era doubts over its political independence.
“The test for the ECB will be to tighten up monetary policy when there is a sustainable increase in prices,” he said.
That hasn’t happened, as unconventional measures were maintained to cope with pandemic shocks. With inflation now above 4 per cent in his native Germany, prompting hysteria in some sections of the media, Dr Weidman feels vindicated with his warnings but sees no political perspective to continue his lonely monetary protest vigil in Frankfurt.
The Bundesbank says it is resigned to an extension beyond next March of the ECB’s €1.85 trillion pandemic emergency purchases programme of government bond-buying. Though the rate of such bond-buying has slowed, it is far from where the outgoing president thinks the ECB should be.
The guessing game has begun over who will follow him – and how aligned, or independent, they will be from Berlin’s new coalition.
Two women are said to be in the running: ECB director Isabel Schnabel, not linked to any political party, and Dr Weidmann's long-term deputy Claudia Buch, seen as a low-key but competent figure. Either of them would help fulfil a promise of the new coalition to bring more women into top economic jobs.
A third candidate is Jörg Kukies, former German head of Goldman Sachs, who moved into the federal finance ministry in 2018 to work alongside chancellor hopeful Olaf Scholz. A final name mentioned in many quarters is Marcel Fratzscher, head of Berlin's left-of-centre DIW economic research institute.
Having the Bundesbank president as a bargaining chip on the coalition table in Berlin adds an extra frisson to coalition talks. Losing their lead hawk in Frankfurt, stability-minded Germans are now pinning their hopes on the liberal Free Democratic Party (FDP). As the third likely partner in a new coalition, it is pushing to secure the finance ministry, in part to put the brakes on a full SPD-Green pivot to more flexible and expansionist financial and monetary policy. Rumours that Berlin will soon be more aligned with the ECB and Brussels would, in that case, prove greatly exaggerated.