Bundesbank Gets New Chief
Feb 16 - Germany's chancellor Angela Merkel names top economic aide Jens Weidmann as the next Bundesbank President. Hayley Platt reports

Voting By Your Weight

Karl Otto Pöhl - former President of the Bundesbank - is quoted in German economic weekly Wirtschaftswoche, making an interesting observation. According to Pöhl, bigger eurozone countries (and most importantly the biggest of them all) should be given greater voting weight within the governing board of the European Central Bank.

He argues:

"It can't be the case that central banks from Malta or Cyprus have as much as a say as the Bundesbank [...] The 'one country, one vote' principle is no longer timely".

Sie sind recht, Herr Pöhl. This makes sense, especially from Germany's point of view. But then why not apply the same reasoning to the UK and the new EU financial authorities, the creation of which MEPs endorsed today in Strasbourg?

Within these supervisors, most decisions will be taken under a 'one country, one vote' arrangement, regardless of the actual size of member states' fianancial markets. As we've pointed out here and here, the UK controls 36% of the EU's wholesale finance market - but will have exactly the same voting weight within the supervisors as all other member states, such as Cyprus or Malta.

Quite irrespective of the merits or the drawbacks of the proposal, that is.

Bundesbank suspects a French conspiracy

The Bundesbank isn't exactly happy about the ECB's decision to start bying government bonds directly from banks - effectively making the once heralded 'independent' bank a dumping ground for bad eurozone loans. The ECB has bought some €25 billion worth of Greek bonds so far.

Spiegel reported over the weekend that Bundesbank officials have openly expressed their suspicions that the entire operation is a French stitch-up - a way for French banks to unload their Greek junk bonds. German banks aren't benefiting from the move since they've promised the German Finance Ministry to keep Greek bonds until May 2013.

One high ranking official is cited by the magazine suggesting that ECB President Jean-Claude Trichet, a French national, gave into pressure from French President Nicolas Sarkozy to change the ECB's stance opposing the purchase of member state governments' bonds - hence the conspiracy charge.

The ECB and the Bundesbank appear to be drifting further apart. Or as Le Monde puts it today, "A perfume of divorce is floating between the Germans and the ECB".

An oldie, but a goodie

As readers are hopefully aware, EU regulation has been on our minds for the last few months as we put together our latest research on the ever increasing cost it has placed on the UK economy over the last eleven years. Old habits die hard and we were therefore (rather worrying) excited to come across this remark by the then President of the German Bundesbank, Prof. Hans Tietmeyer, from a speech in London in December 1997:

“Admittedly, the European ideal is sometimes used to mask nonsense. The anecdotes about pointless regulations planned by bureaucrats would fill volumes.”

Considering that EU regulation introduced in the UK since 1998 has cost the economy £124 billion, we can only wonder what Prof. Tietmeyer would say in 2010.

The first sentence is, however, perhaps more significant. This was a remark given in a speech about the introduction of the euro and, in hindsight, may prove to be very prescient.

No one should take pleasure in witnessing the current difficulties in the eurozone, because, after all, they have the potential for much wider repercussions across Europe and the globe, but maybe eurozone leaders could do well to heed the Professor's message: European ideals are not sufficient to paper over fundamental economic realities.

Not playing along

Following its succesful campaign to pressure Ireland into signing the Lisbon Treaty, the EU elite now seems set on an even bigger task: forcing Germany to accept a bailout plan for Greece. A range of selcted EU leaders hope that Germany will give in at the EU summit later this week.

So far, Chancellor Angela Merkel has (at least in public) resisted EU pressure to open her purse. She has even been forced to instruct her Finance Minister Wolfgang Schäuble to calm down a bit, as Herr Schäuble has proven a bit too enthusiastic about signing up to a Greek rescue plan.

Interestingly, Handelsblatt today reveals that Schäuble's proposal for a European Monetary Fund - which would serve as a long-term solution to the eurozone's woes - was not checked with Merkel beforehand, which apparently now has created a rift between the two. Go figure.

Apart from the split within the government itself, the country's central bankers also seem to have a bit of a beef with the politicans in charge. Througout modern German history, the Bundesbank and the Federal Ministry of Finance have often clashed, and the Bundensbank is certainly not making life easier for German politicans at the moment.

In its monthly report, the Bundesbank pointed out that it is not within the IMF's mandate to help countries to finance their excessive budget deficits. "The IMF's mandate stipulates that it may only use its foreign-currency reserves to bridge short-term balance of payments deficits", the bank claimed.

Given the stakes (a Greek default), publicly resisting an IMF solution (which would be the least painful option for all concerned in our view) seems a bit risky. The Bundesbank must be very confident that Greece will manage to cut its budget deficit, despite not being able to devalue because of its euro membership, and despite not being able to recieve affordable loans (since that's not within the mandate of the IMF, according to the Bundesbank's logic).

Is it implicitly advocating the solution which involves voluntary bilateral loans from eurozone member states? Or maybe it has a different solution in mind? Interestingly, the Bundesbank also pointed out yesterday that it saw the expulsion of a eurozone member as fully possible, since the Lisbon Treaty neither mentions such an option nor excludes it...

Axel Weber, who is now head of the Bundesbank, deserves credit for his boldness (but we're not sure his high profile will help his bid to become the next ECB President).

With an internally split Government, a more assertive Bundesbank and with the meticulous judges at the Karlsruhe court waiting in the wings, this plot is certainly thickening.

Does anyone still believe that Germany is a unitary actor in EU affairs?