Weidmann Shows Draghi Bundesbank Can Say Yes When It Matters

Jens Weidmann’s reputation as the man who won’t say “yes” is much exaggerated.

The German Bundesbank head said on Wednesday that European Central Bank policy makers were right to step up euro-area stimulus this month, though he thought the full package of rate cuts, bond purchases and free loans went too far. What ECB President Mario Draghi criticized at his press conference after the March 10 meeting as the “nein zu allem” strategy -- deliberately using the German phrase for “no to everything” -- didn’t emerge this time.

While this was Weidmann’s most explicit acknowledgment for some time of the need for action, in truth he’s supported negative interest rates in the past and accepted quantitative easing as a valid tool. Even so, Draghi’s comment reflects a history that has seen Bundesbank officials in the Governing Council repeatedly reject ECB innovations to fight euro-area crises.

“Weidmann has never really criticized the need for the ECB to act,” said Carsten Brzeski, chief economist at ING DiBa in Frankfurt. “He wants to be seen as offering constructive criticism even if he didn’t agree with everything, and not just having the position of saying no to everything.”

The Bundesbank president’s current stance reflects the elevated challenges for a currency bloc that’s still fragile after a double-dip recession and financial crisis, and which now faces a global slowdown and market Volatility that could tip it into a deflationary spiral.

‘Need to Act’

The fact that the Governing Council again had to revise its inflation forecasts lower meant it needed to do something, he said in a speech in in Vaduz, Liechtenstein. The ECB predicted inflation will average just 0.1 percent this year and even by 2018 will only have accelerated to 1.6 percent. The rate hasn’t been near the goal of just under 2 percent in three years, undermining the central bank’s credibility.

“Revised economic projections were challenging in monetary-policy terms and showed a need to act,” Weidmann said. “In this question the council was unanimous. However, decisions overall went too far in my opinion and the comprehensive set of measures didn’t convince me.”

One of the ECB’s most momentous decisions, becoming the biggest central bank ever to take a key interest rate below zero, was supported by Weidmann in June 2014. He opposed a subsequent rate cut in September that year, and an easing package in December 2015 that took the rate to minus 0.3 percent.

He also was against the decision in January 2015 to implement QE, though he said the previous year that such a program is “not generally out of the question.”

History of Disagreement

Earlier ECB measures have prompted stronger reactions. After Draghi announced a previous emergency bond-buying program known as Outright Monetary Transactions in September 2012, Weidmann issued a statement saying the plan was “tantamount to financing governments by printing banknotes.”

Still, he didn’t go as far as other Germans in the ECB Governing Council. In 2011, Axel Weber, who preceded Weidmann at the Bundesbank, and ECB Executive Board member Juergen Stark both quit after disagreements over another bond-buying plan pursued by then-President Jean-Claude Trichet.

On March 10, the ECB cut its deposit rate to minus 0.4 percent, expanded monthly bond purchases to 80 billion euros ($89 billion) from 60 billion euros, and added corporate debt into the mix. It also offered loans to banks at potentially negative rates, meaning financial institutions could be paid to take central-bank cash. The idea is to encourage them to lend more to companies and households.

A handful of the 25 Governing Council members were skeptical about bolstering QE and buying corporate bonds, according to officials familiar with the deliberations. Some policy makers argued for a steeper reduction of the deposit rate, and the long-term loans to banks weren’t contentious, the people said.

No Vote

While a rotational system meant that Weidmann didn’t have a vote, he was still able to contribute to the debate. As the central-bank governor for Europe’s largest economy, and the biggest participant in the QE program, he’ll have been listened to, giving him the opportunity to make clear his assent has its limits.

“My thoughts on buying government debt in the currency union are known,” he said in Vaduz. “The recent bleaker outlook for prices and growth does not persuade me of the supposed necessity of using this instrument, that I consider as a purely last-resort instrument.”

He also warned that the more the ECB tries to tackle problems that really require government-led structural reforms, the more it’ll attract calls for extreme policies. One topical discussion in particular he railed against.

“Monetary policy must keep track of the fact that the ongoing low-rate policy and unconventional measures involve risks,” he said. “Even if it’s ‘only’ that the Governing Council must grapple with ever more absurd proposals. Keyword: helicopter money.”

--With assistance from Piotr Skolimowski and Catherine Bosley To contact the reporters on this story: Paul Gordon in Frankfurt at pgordon6@bloomberg.net, Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net. To contact the editors responsible for this story: Craig Stirling at cstirling1@bloomberg.net, Zoe Schneeweiss

By: Paul Gordon and Alessandro Speciale

©2016 Bloomberg News