Bundesbank bites back as German euro doubts grow

Deutsche Bundesbank president Jens Weidmann
Image caption Jens Weidmann has become increasingly critical of the European Central Bank

The Deutsche Bundesbank was once one of the most mysterious, yet powerful, institutions in Europe. Its role? Guardian of the Deutsche Mark - or "D-Mark" - the money that symbolised the post-war German economic miracle.

It was the bank whose monetary policies many other European governments had, in effect, to follow. The Bundesbank, as the author David Marsh entitled his book, was The Bank That Rules Europe.

Then, or so it was widely assumed, the creation of the euro and the European Central Bank (ECB) meant the end of Bundesbank influence. But did it?

Today's Bundesbank, under a steely young new president, is re-asserting itself.

'Loss of reputation'

Jens Weidmann, formerly Chancellor Angela Merkel's adviser, questions much of what eurozone leaders and the ECB are doing.

And he does not pull his punches.

Image caption The Bundesbank president is a former adviser to Chancellor Angela Merkel

In a speech to a G20 conference late last month, he said of the latest bailout deal for Greece: "Ultimately, Greece cannot be forced to comply with the programme.

"But it should be clear," he said, "that no further disbursements will be warranted if Greece fails to keep its side of the bargain."

He questioned too how far the latest eurozone and international measures had solved the crisis, saying: "A crucial requirement now is to prepare for the eventuality of a further escalation of the crisis by initiating appropriate ring-fencing measures."

And in a letter leaked last week to the prominent conservative German newspaper Frankfurter Allgemeine Zeitung, Mr Weidmann warned that the ECB risked "loss of reputation" in its increasing provision of liquidity to weaker European banks.

Where ECB and eurozone leaders acclaim a welcome easing of euro troubles, Mr Weidmann appears to see alarming potential liabilities. He does not think the conditions attached to new ECB loans are strict enough.

And he points out that the Bundesbank, through its participation in ECB action, may be liable for substantial losses in the event of future banking defaults.

This, as author David Marsh explains, "opens up the German public to possibly quite big losses."

'Stable money is good money'

Mr Weidmann seems to be reviving the idea of the Bundesbank as defender of German citizens' money against political irresponsibility.

Image caption The Bundesbank Money Museum teaches German school children "only stable money is good money"

And that is a role with profound historical roots.

The Bundesbank's creed is sound money and hatred of inflation - atoning for the sins of its German monetary predecessors.

In 1923, at the peak of notorious hyper-inflation, the Reichsbank oversaw German consumer prices increasing two-billion-fold in a single year.

Then, after the collapse of the Third Reich, starving, demoralised Germans had to trade for years in cigarettes rather than their useless national currency.

But the arrival of the Deutsche Mark in 1948 changed things dramatically, and in the 1950s the Bundesbank was created to defend the people's cash from politicians armed with printing presses.

This austere institution, based in a Frankfurt suburb, established a popular reputation.

Helmut Schlesinger, Bundesbank president in the 1990s, once told me he used to return to his Bavarian hometown where residents would wag their fingers at him, asking: "You are looking after our money, aren't you?"

"Stability is the soil which nurtures our prosperity," was the kind of homely phrase with which Mr Schlesinger reassured questioners, helping embed Bundesbank thinking into many German minds.

German school children visit the bank's Geld Museum (Money Museum) to be taught that "only stable money is good money".

Increasingly vocal

But the 1990s were the time when Bundesbank power and influence seemed to decline rapidly.

There was a triumphant moment in 1990, when it brought the D-Mark to East Germany as part of German reunification.

But that new monetary union was not to the Bundesbank's liking, as politicians insisted on a more generous exchange rate between east and west than the bank recommended.

The bank's official history of the change describes "expensive mistakes", as East German industry proved hopelessly uncompetitive and huge long-term subsidies were needed.

During the planning of European monetary union, Bundesbank figures expressed misgivings, fearing repetition of such mistakes on a continental scale.

In the end, the euro was created, and the D-Mark abolished.

The Bundesbank survived as Germany's central bank, but with a much reduced role and size.

While the ECB's skyscraper in central Frankfurt attracted all the attention, the Bundesbank remained in the suburbs, its helipad for eminent visitors unused, its leaders largely anonymous.

But as the euro crisis has grown, along with German doubts about the project, so the Bundesbank's views have become more vocal.

"Its role has been upgraded as a result of the crisis," says David Marsh, "it has more real clout than you might think."

Image caption Bundesbank president Jens Weidmann wrote to the ECB to warn it risked a "loss of reputation"

And the Bundesbank has also been thinking about what would happen if the eurozone fragments. Such a scenario, it is widely assumed, would further boost its role.

Bundesbank president Mr Weidmann only has one vote on the ECB governing council, the same as every other eurozone member - even though Germany contributes by far the largest share to ECB resources.

However, he is boosting his influence as Bundesbank presidents have always done - by appealing to German opinion, and posing awkward questions about political decisions.

Dr Waltraud Schelkle is a specialist on economic governance at the London School of Economics.

She notes that Chancellor Merkel has now "realised that the ECB can be useful" and has not publicly criticised recent ECB measures.

The Bundesbank president, says Dr Schelkle, is now trying to "assert his independence" from Mrs Merkel and build his credentials "as a true Bundesbanker".

So today's European politicians, just like their predecessors, may have to spend more time wondering what the Bundesbank will do, and where its latest crusade in defence of "sound money" will ultimately lead.

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Listen toAnalysisonBBC Radio 4on Sunday 11 March at 21:30 GMT. You can listen again via the Radio 4websiteor by downloading the Analysispodcast.

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