© Reuters. FILE PHOTO: Jens Weidmann, President of the German Bundesbank, presents the 2018 annual report to Frankfurt (Germany), February 27, 2019. REUTERS/Kai Pfaffenbach
Francesco Canepa, Balazs Coranyi
FRANKFURT(Reuters) – Jens’s exit from the European Central Bank shows that Christine Lagarde, ECB President, has failed to convince dissenting policymakers and is setting the stage for more frictions.
On Wednesday, the Bundesbank president announced unexpectedly that he will resign, just five years after his time at the German central banks ends.
According to sources inside the euro area central bank, ECB watchers and us, Weidmann’s resignation indicated that Lagarde’s strategy of wooing policy hawks opposed to the ECB’s low-interest credit policies hadn’t worked out and that a rift was still developing between Germany and the ECB.
Some hope Weidmann will succeed, but Lagarde could be in for more trouble.
Because a greater number of policymakers don’t like the ECB’s official position, defended Philip Lane as chief economist, that recent inflation spikes will be temporary,
Carsten Brzeski from the global head of macro at Dutch bank ING, stated, “Lagarde had been the moderator. She was also the communicator. The leader of team spirit.” “There are differing views on inflation. This divergence only will get more.”
While inflation in 19 Euro-using countries was 3.4% at the end of last month, the ECB predicts that it will drop to 1.7% by next year.
Surprised that Weidmann took this step after leading the Bundesbank for 10 years, during which he faced many bigger storms and was the only dissenter from Mario Draghi’s 2011 plan to save the euro, is the timing.
Although Weidmann was known for his disagreement with Draghi, the German would have to give up under Lagarde’s supposedly better collegial leadership.
It is possible that the tipping point was reached in July when the ECB promised to maintain rates at rock bottom until inflation stabilized at its 2% target despite Weidmann’s resistance.
According to sources close to this matter, Lagarde was known for her grinding manner at those meetings and others when policymakers opposed Lane’s proposals.
One ECB policymaker asked to remain anonymous, saying that when they become stuck she will jump in and say, “You’re holding them up, we are in this boat together. We need a consensus so tell us what we can live with.”
She just places people in a bind and continues to put pressure on them until they give up.
DISCOVERY AND DIPLOMACY
Lagarde, who was elected president of the ECB in November 2019, hoped to end the turmoil that had characterized Draghi’s eight years reign.
But divisions flared when the pandemic in 2020 struck. She had to defeat opposition from Weidmann, the Dutch central bank governor Klaas Knot, to order the large-scale emergency bond purchase that stabilized financial markets.
Weidmann tended to keep his disagreements secret, but he was at war with Lane’s proposals for policy changes that would increase or ramp up the purchase of such goods.
Lagarde’s leadership has allowed other frequent dissenters, such as Knot to lower their criticism. The atmosphere within the Governing Council was generally more constructive during Draghi’s time.
Last summer she scored diplomatic success at another hillside retreat. She secured consensus support for a strategy change following an extensive review. The ECB can allow inflation to go beyond its 2% target, even though rates are still low.
Others, such as the Austrian Robert Holzmann and Pierre Wunsch (the Belgian central bank governor) have spoken out more. This could be a sign that Weidmann will leave Lagarde as she has lost an important interlocutor within the hawkish group.
On Wednesday, the ECB President expressed regret over Weidmann’s decision and praised her “loyalty” and willingness to compromise.
Frederik Ducrozet, Pictet strategist, stated that the implications of Weidmann’s departure are more difficult to understand than they were a few decades ago. He has been constructive and not Holzmann.
“Holzmann and Co. may have been able to accept Germany’s decisions easier once they were aboard.”