Bundesbank chief takesover during tough times

21 April 2004

BERLIN – Axel Weber, Berlin’s choice as the new Bundesbank chief, is likely to take over as president of Germany’s central bank at a difficult time with the nation’s economy battling to remain on a growth path and signs of renewed pressure for rate cuts already emerging.

Indeed, the 47-year-old professor of economics will likely be moving into the Bundesbank’s president’s office in Frankfurt and taking up a seat on the rate-setting council of the European Central Bank at a time when economists are revising down their European growth forecasts and when Berlin is facing ECB criticism over its budget policies.

“There is no room for mistakes on the economy,” said Adolf Rosenstock, European economist with Nomura International in Frankfurt after a shaky start to the economic year which has seen a strong euro dampening export growth and ECB warning about sluggish consumer spending.

Moreover, economists said a key challenge facing Weber will be to restore confidence in the fiercely independent Bundesbank after a two-week damaging standoff between Berlin and the bank following the refusal of the bank’s former chief, Ernest Welteke, to resign in a scandal involving the payment of a luxury hotel bill by a commercial bank, Dresdner Bank.

Welteke stepped aside last Friday in the wake of fresh revelations that the former Bundesbank chief had accepted hospitality from luxury German carmaker, BMW AG.

The appointment of Weber, who has already won widespread praise from both business and the opposition, is expected to gain Bundesbank board approval with a spokesman for the central bank Wednesday noting Weber’s credentials for the job and stressing his previous contacts with the bank.

With no political party affiliation, Weber’s surprise nomination also helps to allay fears in the Bundesbank and the financial markets about a possible threat posed to the bank’s independence by the appointment of a new chief who may have been perceived to have had ties too close to Germany’s Social Democrat-led government.

Resistance from the Bundesbank to the government’s nomination could have been especially damaging.

Since his nomination was announced, Weber has indicated he does not intend to ease up on the sharp criticism that has been directed at Berlin by both leading members of the ECB and the Bundesbank over its breaching of the strict budget rules for euro member states.

In his first public comments since his nomination, Weber insisted Wednesday on strict adherence to the fiscal rules saying that the growth and stability pact was an important pillar of the eurozone’s economic structure.

But with Germany’s economic recovery delicately balanced and the nation facing another year of meagre growth and high unemployment, the nation’s political leaders, from Chancellor Gerhard Schroeder on down, have been piling on the pressure on the ECB to deliver a rate cut as a way of spurring growth in the country and among its partners in the 12-member eurozone.

In comments to German television N-TV following Weber nomination, Margret Moenig-Raane, vice-president of Germany’s biggest union, Verdi, insisted that the new Bundesbank president would have to give priority to economic growth.

Underscoring the currently sickly state of Europe’s biggest economy, a key German economic sentiment indicator that surveys analysts and investors fell by a much sharper than expected amount this week.

Another round of downbeat economic data and surveys could set the stage for a new power struggle between Europe’s political establishment and the ECB over a rate cut.

But economists also stressed that as one member of the ECB’s 18- head governing council, Weber’s influence on monetary policy is likely to be limited.

Apart from a possible new ethics code for the Bundesbank, one other crucial issue for Weber is also likely to be the question of the bank’s stance on the proceeds from gold sales with Welteke having outlined plans to sell off part of the Bundesbank’s huge gold reserves and to use the funds for investing in research.

While several members of the Bundesbank’s eight-member board have close links to academic life, Weber – also a member of the government’s council of economic advisers – is one of the first academics to be propelled straight to the top central bank’s top job.

Economists say this places him in a very strong position to help shape some of the more laborious and complicated internal monetary debates that rage within the ECB. European Central Bank observers said Welteke tended to shy away from many of these internal discussions.

As an academic from outside the Bundesbank, however, one of the challenges facing Weber is likely to be driving forward necessary reform of the central bank, which has followed Europe’s currency union more than five years ago and the handing over of rate-setting powers to the ECB.

In particular, Weber could encounter powerful resistance to what many analysts believe is much-needed downsizing of Bundesbank’s staff numbers.

DPA

Subject: German news