Expatica news

ECB faces risks in Bundesbank affair

14 April 2004

BERLIN – Already under fire for sending out mixed signals on monetary policy, the European Central Bank now risks becoming embroiled in a damaging row sparked by revelations that a commercial bank paid the luxury hotel bill of a prominent national member of the ECB’s rate-setting council.

Moreover, the revelations that Ernest Welteke, the chief of Germany’s once powerful central bank, the Bundesbank, allowed Dresdner Bank to pay a EUR 7,661 bill for a four-night stay with his family at Berlin’s Adlon hotel have once again served to underscore the political pressure on the ECB to cut rates to spur growth.

Having spearheaded a campaign for rate cuts to shore up the eurozone’s fragile economic recovery, the push by Chancellor Gerhard Schroeder’s government to remove Welteke have raised concerns that Berlin might be considering attempting to shift the balance on the ECB’s council away from its current hawkish stance on rates towards a more dovish position.

The risk, according, to Hans Redeker, economist with BNP Paribas, is that this could place into question the bank’s credibility in the market.

At the same time, apparently conflicting remarks by ECB chief Jean-Claude Trichet about the state of the 12-member eurozone economy have also led to speculation about tensions inside the world’s second most influential central bank over the direction of its monetary policy.

After appearing to flag a somewhat accommodative approach to cutting interest rates in the run-up to this month’s ECB council meeting, Trichet surprised markets by taking a more hard-line approach to reducing borrowing costs in comments at his post-meeting press conference.

In the meantime, however, Welteke’s decision to temporarily vacate his post while the affair surrounding the Adlon bill is investigated rather than to resign has plunged relations between the Bundesbank and the German government into an unprecedented crisis.

As one of Germany’s leading banks, Dresdner falls under the Bundesbank’s regulatory powers. Berlin is thought to be interested in replacing Welteke with top finance ministry official Caio Koch-Weser, who Washington rejected in 1999 as the Schroeder government’s candidate for chief of the International Monetary Fund.

But while Bundesbank officials have lashed out at Berlin saying that the push to oust Welteke threatened its independence, German Finance Minister Hans Eichel this week stepped up the pressure on his nation’s central bank chief to step aside.

“I consider it is not acceptable that the chief representative of the bank, who has supervisory functions, should accept a holiday paid for by a bank which is under his supervision,” Eichel told Germany’s daily Frankfurter Allgemeine Zeitung Wednesday.

Eichel went on to say that Welteke’s behaviour breached the ECB’s code of ethnics and to roundly reject opposition that the government had ulterior motives in suggesting Welteke, who has clashed with Berlin over the sale of gold reserves, budget deficit and economic reforms, should, as a government spokesman said, draw the necessary conclusions from the affair.

But coming at a time when Berlin has been roundly attacked for its tough labour and welfare reforms the revelations that Dresdner picked up the hotel tab for Welteke, who is a member of Schroeder’s ruling Social Democrats and has an annual salary of EUR 350,000 is also politically very damaging for the government.

Along with top ECB officials, the 61-year-old Welteke, is one of the chiefs of 12 euro member states central banks with a seat on the ECB’s 18-head rate-setting council.

During Welteke’s leave of absence, his seat on the ECB governing council is to be taken by Bundesbank vice president Juergen Stark, who is seen by the markets as a traditional monetarist and who was an architect of the eurozone’s strict fiscal targets.

While a spokesman for Eichel refused Wednesday to be drawn on questions about the impact on the ECB of the Welteke hotel bill affair, another government spokesman expressed concern that a protracted investigation into the affair could damage the Bundesbank’s image.

But with its code of ethics now in focus, the ECB is, according to Germany’s daily Handelsblatt newspaper, to discuss at its meeting next week Welteke’s stay at the Adlon during the 2002 New Year celebrations, which also marked the launch of the euro notes and coins.

While the Bundesbank launched a probe into all gifts received by its eight-member board, Welteke and the bank this month paid back the bill, which was also for the central bank chief’s wife, three-year- old son, 25-year-old son and his girlfriend.

Subject: German news