New Bundesbank President calms situation;

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E.O. 12958: N/A
TAGS: ECON EFIN EUN
SUBJECT: New Bundesbank President calms situation;
ethics moves to the fore


T-IA-F-04-0004

This cable is sensitive but unclassified. Not/not
for Internet distribution.

Ref: (A) Berlin 1385 (B) Berlin 1416


1. (SBU) Summary: Well-respected monetary policy
expert Axel Weber was appointed as the new Bundesbank
President. A supporter of stability-oriented monetary
policy, his nomination was well-received across party-
lines and among academics as well as in the financial
markets. While many observers had feared that the
federal government would take advantage of the
opportunity provided by Welteke's resignation to
increase its influence on the Bundesbank, these
concerns were alleviated by the nomination of Weber.
Meanwhile, the Welteke case appears to have increased
German public sensitivity with regard to ethical
conduct. End summary.

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Axel Weber Appointed as Bundesbank President
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2. (SBU) On April 30, Axel Weber was formally appointed
as the new Bundesbank President by President Rau. On
April 27, the Bundesbank board approved his nomination
by the federal government.


3. (SBU) Former Bundesbank President Ernst Welteke
stepped down after the media exposed details about his
(and his family's) four-day stay at a luxury hotel in
Berlin paid for by Dresdner Bank. Subsequently,
Frankfurt public prosecutors launched an investigation
to assess whether Bundesbank President Ernst Welteke
"accepted an advantage" or Dresdner Bank intended to
gain one. The investigation is still underway.
Initially reluctant to resign, Welteke stubbornly
rejected criticism but eventually conceded when new
accusations appeared in the media about a stay at a
Formula 1 race in Monaco at the invitation of BMW. The
carmaker also owns a bank, which is supervised by the
Bundesbank.

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Axel Who?
--------------


4. (SBU) Although largely unknown to the wider public,
Weber is a well-respected academic, whose main research
area is monetary policy. He teaches economics at the
University of Cologne and is a member of the Council of
Economic Advisers to the federal government. From 1998
to 2002, he was director of the Frankfurt-based Center
for Financial Studies, which has close ties with both
central banks - including the ECB - and private
financial institutions. Reportedly, Weber is a
confidant of ECB chief economist Otmar Issing.


5. (SBU) Since October 2000, Weber has been a member of
the Academic Advisory Council to the Bundesbank. He
was Visiting Fellow at the Brookings Institutions in
1992/93, and before that at the Center of Economic
Research of the University of Tilburg and at the Queen
Mary College of the University of London. He is also a
Research Fellow of the Center for Economic Policy
Research (CEPR).

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Where does he stand?
--------------


6. (SBU) Weber is politically independent and has
described himself as a "partisan of stability-oriented
monetary policy".


7. (SBU) At the press conference following his
nomination, Weber stated that the Council of Economic
Advisers' assessment of the current interest rate level
last fall is still correct. The Advisers found that
the key interest rate was adequate given the exchange
rate environment. More generally, Weber argued that
monetary policy makers should not look dogmatically at
only a few variables when trying to control inflation.
He stated that a range of variables, not only money
supply, needs to be taken into account. He pointed out
that the ECB strategy was developed for the transition
to EMU, without practical experience on how the
transmission mechanism would work. Although the ECB
reviewed this last year, Weber considers the process to
be incomplete at this point.


8. (SBU) In their 2003 report, the Council of Economic
Advisers - led by monetary policy expert Weber -
welcomed in principle the review of the ECB's strategy,
but qualified their approval by noting that the full
integration of the two pillars ("economic" and
"monetary" analysis) would have been advisable. The
Council also stated that a more precise numerical
definition of the inflation target would have enhanced
transparency. More generally, it criticized that the
methods used to collate all the information relevant
for decision-making are not sufficiently transparent
and understandable. The report called for the ECB to
further strengthen the role of its inflation and
economic forecasts both in its decision-making and its
communication.


9. (SBU) Observers call Weber "pragmatic and
undogmatic", fully in line with the "neo-classical
mainstream". He is against using monetary policy for
anti-cyclical fine-tuning, but is well aware that
interest rate policies have an impact on the real
economy. Weber has stated in the past that the low
growth in Germany cannot be overcome by short-term
impulses, but that there is a need for structural
reforms. This assessment is in line with the
Bundesbank position.


10. (SBU) When asked at the press conference whether he
considers the current exchange rate system as
appropriate, he answered that he finds this question
"somewhat weird" and that exchange rates are the result
of market processes.


11. (SBU) Moreover, Weber stressed that the Stability
Pact is still an important pillar of fiscal policy and
must not be damaged. He called for a fast reduction of
deficits in order to restore the credibility of fiscal
policies. He is skeptical of proposals by some Social
Democrats to introduce exchange rate targets or a Tobin-
tax.


12. (SBU) Weber also said at the press conference that
the internal structural reforms launched by the
Bundesbank are "absolutely right". He suggested that
it put more emphasis on its competence in financial
market issues and lead the way in that area within the
euro zone in the future. Observers expect him to
strengthen monetary and financial research within the
Bundesbank in order to bolster his positions in the ECB
Council.


13. (SBU) Bert Rrup, also a member of the Council of
Economic Advisers, characterized Weber as an advocate
of rules-based monetary policy. Rrup would not call
him an "extreme hawk", but sees him in the Bundesbank's
tradition of strict adherence to stability. Overall,
Rrup considers Weber to be an "excellent macro-
economist, laying particular emphasis on empirical work
rk
and with profound knowledge of monetary policy
institutions".


14. (SBU) Weber is not known as an extrovert. Even in
his capacity as member of the Council of Economic
Advisers, some of whom keep a high media profile, he
has hardly ever spoken out. His students at the
University of Cologne characterize his lectures as
"dry" yet "demanding".

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Reactions
--------------

15. (SBU) The nomination of Weber was well received
across party lines. The opposition CDU, CSU and FDP
all welcomed the government's decision, stressing that
it is in the interest of the Bundesbank's independence.
Both academic and financial market circles reacted
positively.


16. (SBU) Some observers, however, regard his lack of
practical central banking experience as a weakness.
Moreover, they claim that he has no experience in
managing and restructuring a large institution.


17. (SBU) Others criticize that the natural and best-
qualified candidate for Bundesbank President would have
been Vice-President Jrgen Stark, who was not favored
by the government as he is too close to the CDU.

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Wider Implications
--------------


18. (SBU) As a consequence of the Welteke scandal,
Theodor Baums, law professor at the university of
Frankfurt and financial market and corporate governance
expert, was put in charge of corporate governance at
the Bundesbank. He monitors compliance with the rules
of conduct for the Bundesbank board, laid down in the
Bundesbank law, the contracts relating to regional
offices and branches, and the ethical code of the ECB.
Baums' nomination is to ensure an "independent and
objective external monitoring".


19. (SBU) Reportedly, the Finance Ministry insists on a
clause in Weber's contract, referring to the strict
rules of conduct for civil servants. As a consequence,
changes may also need to be introduced in the contracts
of the other Bundesbank board members.


20. (SBU) The recent events at the Bundesbank have
raised public awareness of ethical conduct issues.
Welteke's behavior may just be the tip of the iceberg -
other similar cases are possible. The public outrage
over the Welteke case may thus lead to the
establishment of ethical rules or code of conduct in
the Bundesbank or other institutions or, where they
exist already, to stricter enforcement.


21. (SBU) Cleared with U.S. Embassy Berlin.


22. (U) POC: C. Ohly, Economic Specialist, e-mail
ohlyc@state.gov; tel. 49-(69)-7535-2367, fax 49-(69)-
7535-2238.

BODDE