DIRECTOR OF CURRENCY RESEARCH, GFT
AXEL Weber’s unexpected resignation from the Bundesbank last week has created a growing sense of unease amongst European investors. Weber, an unrepentant hawk who could ruffle feathers, was considered to be the leading candidate to succeed European Central Bank (ECB) president Jean Claude Trichet. Trichet’s eight-year term will expire this October.
In a recent Der Spiegel interview Weber hinted at the reasons for his exit. He feared that the credibility of the ECB presidency would be damaged if the incumbent was consistently outvoted by the rest of the board. Weber has been a vocal opponent of the central bank’s bond-purchase program that has provided lifelines for European banks and governments trying to shore up their balance sheets.
Regardless of the reasons, Weber's exit has created serious problems for the Eurozone’s fiscal and monetary officials. Germany is the primary source of capital for the region’s rescue schemes and many market observers believe that it will not be nearly as amenable to additional capital infusions without a German leadership role at the ECB.
There is good reason to believe that the eurosceptics may be right. For the Eurozone to survive the upcoming challenges of refinancing periphery sovereign debt, Berlin and Frankfurt will need to closely coordinate their fiscal and monetary policies. A German at the head of the ECB could prove to be a strong goodwill ambassador to German taxpayers who will shoulder most of the burden.
Love him or hate him, Trichet has been an extremely effective spokesman for the euro, creating tremendous credibility for the single currency over the past decade. Weber was the only other member of the ECB council that carried the same respect in the market.
Angela Merkel will announce a replacement for Weber at the Bundesbank within a few days, but the broader issue of who will lead the ECB remains an open question and could weigh on euro-dollar for the foreseeable future. Currency traders are notoriously uncomfortable with political uncertainty and the current predicament could push euro-dollar towards the $1.3000 level if no viable candidate emerges soon.