September 10, 2011 / 1:47 PM / 7 years ago

Stark resignation limits Draghi's room on bond buys

FRANKFURT (Reuters) - By resigning in protest at the European Central Bank’s bond-buying programme, heavyweight policymaker Juergen Stark has increased the pressure on incoming ECB president Mario Draghi to use the plan sparingly.

The ECB announced on Friday that Stark, the top German at the ECB, will quit in what sources say is a protest against its policy of buying bonds to help troubled euro zone debtor states, with Italy now foremost among them.

Draghi, an Italian who takes over the ECB helm on November 1, can ill afford to be seen as going soft on his own country — especially when many in Germany, the euro zone’s biggest economy, are skeptical about the bond buys, his presidency and now the whole credibility of the ECB.

Draghi only emerged as favorite to succeed President Jean-Claude Trichet after the resignation earlier this year of Bundesbank chief Axel Weber, who, together with Stark, was one of the high priests of German central bank orthodoxy.

Stark’s surprise move has stirred debate about the bond-buy plan in Germany, with commentators expressing shock and fear about the direction of euro zone policy and fearing the move marks the end of an ECB made in the image of the Bundesbank.

His departure also raises scrutiny of Draghi, who courted the Germans to win their backing for the presidency and will not want to further alienate the ECB’s biggest constituent.

“It adds to the reasons for Draghi to be seen as being on the hawkish side — both on interest rates and bond buying,” said Berenberg bank economist Holger Schmieding.

“He will have to establish the credentials that Trichet had. The way to do this is to surprise people on the hawkish side.”

A euro zone central bank source said Stark felt Trichet’s departure when his term ends next month would mark the end of an era at the ECB.

Stark and Bundesbank head Jens Weidmann both opposed the ECB’s decision last month to reactivate the plan following a 19-week pause. The bank decided to buy the bonds of Italy and Spain after they came closer to succumbing to the debt crisis.

But the plan is seen by many here as taking the ECB into the fiscal arena and threatening its core role of fighting inflation. Weber’s opposition to the programme ultimately led to his resignation and Germany’s president has even questioned the legality of the plan.


The ECB only decided to reactivate its bond programme after writing to Italy, laying out demands for action on consolidating the budget, although the exact terms of what it required have not been revealed.

It also resumed its bond buys on the understanding that a July euro zone deal meant the European Financial Stability Facility (EFSF) — the bloc’s rescue fund — could take over the bond buys after just a couple of months.

Euro zone leaders had hoped national parliaments would approve the EFSF reforms by early October but that goal appears to be slipping. A senior Slovak politician said last week that his country’s parliament would vote on the reform in December at the earliest, although the Slovak Finance Ministry urged lawmakers on Monday to act sooner.

This means the ECB could be left on the hook for longer — a scenario Trichet did not rule out when asked directly about such a possibility at the bank’s monthly news conference on Thursday.

Trichet also indicated that he was satisfied with the latest austerity measures of the Italian government, comments he made despite some ECB policymakers being concerned that by buying the sovereign bonds of Italy it is encouraging Rome to slacken efforts to shore up its finances.

These developments could not have pleased Stark.

“He is too rigid to accept that his line is not followed by the others. He has realized he was not in a position to influence the other ECB board members,” one central bank source said.


Germany formally put forward its deputy finance minister, Joerg Asmussen, on Saturday to replace Stark. Asmussen is a Social Democrat but was kept by German Chancellor Angela Merkel’s conservatives after the last federal election due to the experience he had gained in fighting the financial crisis.

Bert Ruerup, former head of the ‘wisemen’ council of economic advisers to the German government told Reuters Asmussen would be more pragmatic than Stark.

“I don’t think that he will fight as openly. This may calm down when the EFSF gets the power to buy bonds,” he said.

Either way, economists expect Stark’s departure to have little influence on ECB monetary policy. Although he holds the powerful economics portfolio on the six-member Executive Board, he is just one of 23 voices on the bigger Governing Council.

The ECB signaled on Thursday that it had halted a cycle of interest rate rises begun just five months ago, saying euro zone inflation risks were no longer skewed to the upside and economic growth would be slow at best.

This change of tone opened the door to an interest rate cut in the eyes of some economists.

“If Trichet waits then Draghi will face making that decision in his first meeting as ECB President in November,” said Mansoor Mohi-uddin, head of foreign exchange strategy at UBS, who pointed to research showing changes in central bank governors have had a pronounced impact on financial markets.

“This is clearly shaping up to be the case now at the ECB, making the euro a sell on rallies even after this month’s sharp decline,” he said.

Additional reporting by Annika Breidthardt and Giselda Vagnoni, editing by Mike Peacock

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