End of an era as Bundesbank chief Jens Weidmann steps down

Jens Weidmann has decided to step down after a decade as head of Germany’s central bank, only weeks after the country’s general election and shortly before a crucial decision on the future of eurozone monetary policy.

The president of the Bundesbank has been one of the most vocal critics of the ultra-loose monetary policy pursued by the European Central Bank, where he fought an often lonely battle against its bond buying and negative interest rate policies.

The 53-year-old said in a statement on Wednesday that he was leaving for “personal reasons”. But colleagues said he was tired of opposing ECB policies and expected these frustrations to increase as the economy recovers, inflation rises and the ECB’s generous stimulus becomes harder to justify.

Weidmann told Bundesbank employees in a letter that he had decided to step down at the end of the year, adding: “I have come to believe that more than 10 years is a good time to start a new chapter — for the Bundesbank but also for me personally.”

His planned departure, less than two years after his mandate was extended for another eight-year term, comes as the ECB prepares for a vital meeting in December when it is due to decide how fast to wind down the €1.85tn bond-buying plan it launched in response to the pandemic and how much stimulus to maintain after that.

Weidmann’s move also comes as German political parties are locked in negotiations to form the country’s first three-party ruling coalition since the 1950s. Weidmann worked as an adviser to chancellor Angela Merkel before his appointment to run the Bundesbank in 2011. His decision to resign means they look set to leave office around the same time.

Steffen Seibert, a government spokesman, said Merkel had noted Weidmann’s decision “with regret and respect”, adding that it would be up to the next government to choose his successor “to continue the stability-orientated legacy of the Bundesbank”.

If the new government, likely to be a left-leaning coalition led by Olaf Scholz, currently the finance minister, cannot agree on Weidmann’s successor by the end of this year, Claudia Buch, Bundesbank vice-president, would become interim central bank chief.

Weidmann, who lost out in the race to replace Mario Draghi as ECB president in 2019, made the decision to step down earlier in the year, but waited until after the election to avoid the impression that it was a politically motivated move, according to a person briefed on the matter.

He also felt he should quit before Germany takes over the G7 presidency in January. The Bundesbank is due to move into a new office in central Frankfurt at the start of next year.

As the longest-serving member of the ECB’s governing council, and one of its most “hawkish” voices who upheld the Bundesbank’s traditionally orthodox views on monetary policy that draw on Germany’s experience of hyperinflation in the 1920s, his departure opens the door to a potential further shift in favour of the ECB’s “dovish” majority.

Holger Schmieding, chief economist at Berenberg, said: “The new German government will probably appoint a less hawkish successor,” adding that it could choose Isabel Schnabel, Germany’s recent appointment to the ECB executive board, “or somebody with similar mainstream views”.

Buch would be another contender if the new government wanted to make Germany the first eurozone country to appoint a female head of its central bank.

Other potential candidates include: Jakob von Weizsäcker, chief economist in the German finance ministry; Jörg Kukies, a finance ministry official and former Goldman Sachs executive; Rolf Strauch, chief economist at the European Stability Mechanism; and Marcel Fratzscher, head of the German Economic Institute for Economic Research.

However, many of these candidates are likely to have a more moderate approach to monetary policy than Weidmann, risking opposition from the liberal Free Democrat Party, which is in talks with the Greens and Social Democrats to form the new government and has more hawkish instincts.

Christian Lindner, head of the liberal party, hinted at this when he tweeted that under Weidmann’s leadership the Bundesbank had “an important voice in Europe,” adding: “The FDP recommends German continuity.”

Hans Michelbach, outgoing finance spokesman of Merkel’s CDU party in parliament, summed up these fears by saying that Weidmann’s departure was a “disastrous signal for the future [of] monetary and fiscal policy in Germany and Europe”.

The Bundesbank boss has frequently warned that the ECB is underestimating inflationary pressures, and its independence could be eroded because of how reliant heavily indebted governments have become on its bond-buying programme to keep their borrowing costs low.

Resurgent consumer demand, soaring energy prices and supply-chain bottlenecks drove inflation in the euro area up to a 13-year-high of 3.4 per cent in September. German inflation, meanwhile, rose to a 29-year high of 4.1 per cent.

“It will be crucial not to look one-sidedly at deflation risks, but also not to lose sight of prospective inflation risks,” Weidmann said in Wednesday’s letter. “And crisis measures, with their extraordinary flexibility, are only proportionate in the emergency situation for which they were created.”

He also stressed the importance that “monetary policy respects its narrow mandate and does not get caught in the wake of fiscal policy or the financial markets”.

Bundesbank officials have been unsettled by recent calls from some ECB council members for it to maintain a significant bond-buying scheme and to loosen some of its self-imposed restrictions on asset purchases, even after it judges the pandemic crisis to be over.

With Weidmann due to step down on December 31, days after the ECB’s last council meeting of the year, analysts said he may decide to be more vocal than usual in his opposition to any potentially “dovish” shift.

“The fact that Weidmann often did not get his way may have played a role in his resignation,” said Jörg Krämer, chief economist at Commerzbank. “A new federal government is unlikely to appoint a Bundesbank president who is again at odds with the majority opinion in the ECB council.”

Once dismissed by Draghi as Nein zu allem — German for “No to everything” — Weidmann spent his early years openly criticising the ECB’s increasingly unconventional policies that flooded markets with cheap money.

Yet after Christine Lagarde took over as ECB president in 2019 and was confronted with the Covid-19 crisis, Weidmann became less confrontational and even accepted its recent strategic overhaul, which allowed a temporary overshooting of its inflation target.

Lagarde said in a statement that she respected Weidmann’s decision, “but I also immensely regret it”, adding: “Jens is a good personal friend on whose loyalty I could always count.”

The conservative monetary doctrine of Germany’s Bundesbank formed the bedrock of the euro’s creation. But over the past decade the ECB has steadily drifted away from this orthodox stance to establish a more expansionary policy approach.

This created tensions that caused several German representatives on the ECB council to quit before their term expired in frustration at the dovish shift.

Sabine Lautenschläger resigned as an ECB executive board member in 2019, three years before her term expired and shortly after Draghi caused uproar in Germany by announcing another cut in interest rates and a restarting of bond purchases.

In 2011, Jürgen Stark quit as ECB chief economist in protest at its purchases of government bonds in response to the eurozone debt crisis. Earlier that year, Axel Weber quit as head of the Bundesbank after fiercely opposing the ECB’s strategy.