German Banker's Slide Bares Europe's Divide

By BRIAN BLACKSTONE

FRANKFURT—Bundesbank President Axel Weber's repeated attacks on the European Central Bank's handling of the euro-zone debt crisis have jeopardized his chances for taking the ECB helm, opening the race for the coveted post to a host of other contenders.

Mr. Weber's blunt opposition to the ECB's purchases of euro-zone governments' debt is going down well in Germany, where the rescue of fiscally wayward Greece is deeply unpopular. But his hard line is causing divisions with Europe's other central bankers, and this week brought more indications that he risks alienating France and other countries whose support Germany needs to secure the top job at the ECB.
The renewed uncertainty over who will oversee the zone's monetary policy underscores the deep divisions that remain in the wake of the Greek sovereign debt crisis that imperiled Europe's finances.

Germany's financial muscle allowed it to call the shots during the rescue of Greece this spring. Its recipe for overhauling the euro zone's governance is based on fiscal discipline and self-reliance by national governments, in order to reduce the need for rescues of weaker euro members by German taxpayers or the ECB.

Now, Southern European countries led by France are pushing back. This week, resistance from Southern Europe forced Germany to soften its demands for penalties that would kick in automatically when EU members broke the union's fiscal rules.
Germany's isolation on euro-zone economic governance raises questions about how comfortable the euro-zone majority would be with a German at the helm of monetary policy.

Mr. Weber, a 53-year-old former economics professor, is still seen by many policy makers and analysts in Europe as the front-runner in the unofficial race to succeed Jean-Claude Trichet as ECB president in October 2011. But growing irritation at the German's blunt criticism of ECB policies means Mr. Weber is no longer a shoo-in.

The matter has come to the fore in recent weeks, as Mr. Weber renewed his objection, first raised in May, to the ECB's plan to buy national debt of the euro zone's weak governments. Mr. Weber has suggested the program backstops indebted national governments, rather than encouraging them to get their finances in order.
France and others were vociferous supporters of the bond-buying plan. In recent days, French media reports have suggested President Nicolas Sarkozy is cooling on the idea of Mr. Weber as ECB chief.

"Weber's odds are around 50% now," says Stefan Gerlach, professor of monetary economics at Frankfurt University. Before May, Mr. Gerlach says, he would have placed his chances at about 90%.

A Bundesbank spokesman declined to comment on the speculation.

Mr. Weber's public questioning of the ECB has angered his colleagues on the bank's governing council, some of whom privately say he has broken their collegial code of keeping disagreements between themselves.
After Mr. Weber publicly called the bond-buying program a failure last week, the usually diplomatic Mr. Trichet issued a rare rebuke, saying the German's opinion "is not the position of the Governing Council."
Many analysts wonder why Mr. Weber would stir controversy again while the ECB presidency is still his to lose. Mr. Weber's stance may reflect growing concern at the Bundesbank that, while the ECB has talked about phasing out other unconventional measures introduced during the financial crisis, it hasn't ended its debt purchases.

Although the ECB has bought only small volumes of sovereign debt recently, the policy's existence sends a signal to investors and euro-zone governments that the central bank will prop up public borrowing, critics argue.
Mr. Weber warned last week against "the illusion that we at central banks can achieve things that only the taxpayer and ultimately the governments can achieve," referring to sustainable public finances.

France's voice will be crucial in determining whether German Chancellor Angela Merkel succeeds in installing Mr. Weber as Mr. Trichet's heir, since a Franco-German understanding usually leads to wider euro-zone accord.
Other central bankers seen as contenders for the ECB job include Bank of Italy head Mario Draghi, Yves Mersch of Luxembourg and Erkki Liikanen of Finland.
The main factor in Mr. Weber's favor could be the lack of an obvious alternative, say ECB watchers. "There seems to be a lot of difficulty identifying another credible candidate," says Marco Annunziata, chief economist at lender Unicredit in London.

His nearest rival, Mr. Draghi, is respected for his crisis-management skills. He is also well known in global policy circles through his chairmanship of the Financial Stability Board, a group of central bankers and finance officials tasked with revamping global banking rules.
Mr. Draghi's diplomatic skills make him more popular with his European peers than the sometimes abrasive Mr. Weber, ECB watchers say. A recent meeting in Paris between Mr. Draghi and Mr. Sarkozy stirred media speculation in France and Italy that the French leader may be warming to the Italian. The meeting focused on Mr. Draghi's bank-reform work with the FSB and didn't cover other matters, a person familiar with the matter says.
Mr. Draghi's big problem: Top jobs in European Union institutions are usually parceled out to maintain a geographical balance, and the ECB already has a Latin No. 2, Portugal's Vitor Constancio. That makes it more likely the next ECB head will be a Northern European.

Central bankers from smaller countries such as Luxembourg or Finland are seen as outside bets, since France and Germany have shown a clear preference in the past for large countries to hold the ECB presidency.
Indeed, Berlin's backing for Mr. Constancio's appointment earlier this year—together with Germany's decision not to bid for top positions in the EU's Brussels bureaucracy—are a major reason why observers think the next ECB chief will be a German.

If Mr. Weber's personal tensions with his ECB colleagues mount, Germany might tap a replacement such as Klaus Regling, a former official at the International Monetary Fund and the European Commission.

Mr. Regling is currently head of the European Financial Stability Fund, the euro zone's bailout facility for indebted members. "He's the best second-row candidate Germany would have," says Carsten Brzeski, economist at ING Bank in Brussels. (Fonte: Wall Street Journal)