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August 03, 2012 at 05:00 AM
While European Central Bank (ECB) President Mario Draghi’s lack of direct and drastic action on Thursday disappointed markets, he’s thrown down the gauntlet in challenging Bundesbank President Jens Weidmann’s opposition to a plan for the ECB to reenter the bond markets.
Bloomberg reported Friday that Draghi took the unusual step of calling out Weidmann by name in his Thursday comments about tactics the ECB could use against the financial crisis. Among those tactics is a resumption of bond purchases, something the ECB had halted in March but which is now being discussed again.
Draghi announced a bond purchase plan currently being worked out by the ECB, although its actual execution remains weeks away—a fact that put a damper on markets. However, the ECB said that it would buy Italy’s and Spain’s bonds on the market, provided that the European Stability Mechanism (ESM) also buys bonds—directly from the two countries’ treasuries—and does so only under stringent conditions.
After his announcement about the plan, Draghi was quoted saying, “It’s known that Mr. Weidmann and the Bundesbank have their reservations about programs that buy bonds.”
Weidmann has been known to oppose such an action, conditions or no, and two German members of the ECB’s Governing Council had quit the central bank in protest over its bond-buying program. Still, being called out in public as the sole member of the ECB to stand against the action is a violation of previous policy; the ECB does not reveal votes of individual policymakers or minutes of its meetings so that members are protected from political pressure.
Public disagreement wasn’t lacking in the Bundesbank’s approach to the matter, however. After Draghi referred to a bond-buying program in a London speech several days ago, a Bundesbank spokesman repeated the German central bank’s opposition to any such action.
On Aug. 1, Weidmann himself was quoted saying, “We are the largest and most important central bank in the eurosystem and we have a greater say than many other central banks in the eurosystem.” He added that the ECB’s independence “requires it to respect and not overstep its own mandate”—which, according to Weidmann, does not include buying bonds.
The Bundesbank’s opinion and Weidmann’s vote both carry a lot of weight. Although Weidmann is only one voice on the ECB’s 23-member council, that voice carries. Julian Callow, chief European economist at Barclays in London, said in the report, “The Bundesbank veto matters a lot in this. We need to know exactly how the Bundesbank is appraising things.”
