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Draghi stalked by the ghost of Bundesbank past

8/6/12 4:11 AM ET (MarketWatch)Print

LONDON (MarketWatch) -- Mario Draghi is a central banker with the brain of a nuclear scientist and the eyes of a medieval pope. He heads the European Central Bank, a modern-day monastic order with both spiritual and earthly powers. The perfect repository for his considerable skills.

At the center of a struggle to give the ECB a prime role in saving the euro (EURUSD) , he will need every one of them.

The ECB boss will have to shake off, too, the legacy of previous tussles with the German Bundesbank. As the events of the past 10 days have shown, these memories are now returning. Forget Charles Dickens and "the ghost of Christmas past."

As we see in the differences of opinion on whether the ECB should restart its policy of buying European sovereign bonds, the ghost of Bundesbank past is back again.

Draghi is a man of experience. At the Frankfurt press conference on Aug. 2 after the ECB governing council's no-decisions-now-but-maybe-there-will-be-in-future meeting on bond purchases, he fended off with well-practiced aplomb allegations that he had backtracked from his somewhat overpublicized statement in London a week earlier.

As he protested in his speech at a London "investment conference" on July 26 (a curious occasion organized by the British government to grandstand the Olympic Games), Draghi indeed said nothing at all concrete about bond purchases or any other measures. "Read the speech," he remonstrated. "The speech does not say anything about timing, bond-buying programs, shorter term -- there is none of that."

Draghi is one of a dwindling band of still-operating senior officials and ministers who were caught up in the European currency crises of 1992-93, which played a seminal role in the buildup to economic and monetary union (EMU).

He knows, better than almost anyone, how risky it is to brook full-frontal confrontation with the Bundesbank.

The German central bank, in the shape of its doughty then-President Helmut Schlesinger, was a principal bête-noire 20 years ago for the U.K., Italy and France, the other three main economies along with Germany in the European exchange-rate mechanism (ERM), the forerunner of EMU.

The hard-line Schlesinger was an irritant for the Americans, too. Jim Baker, as Treasury secretary under President Ronald Reagan, once famously and somewhat ludicrously blamed the Bundesbank's then–deputy president, through a minuscule interest-rate tightening, for precipitating the 1987 international stock-market crash.

As director of the Italian Treasury two decades ago, Draghi was particularly affected by Schlesinger's decision in September 1992 to invoke the so-called Emminger letter (named after another former Bundesbank president). This allowed the German central bank to make use of a secret agreement from 1978 to withdraw from intervening to support the lira, forcing the Italians to leave the ERM.

The Bundesbank's revelation of the nonintervention doctrine contained in the Emminger letter, in a phone call to Rome on Sept. 11, 1992, caused Carlo Ciampi, then Italy's central-bank governor, to turn "pale, almost white," according to Giuliano Amoto, Italy's then–prime minister.

Schlesinger, now a sprightly and affable 87, retired 19 years ago. Well out of circulation, you might think. Probably peacefully tending his roses somewhere? That would be a legitimate assumption.

Nothing to worry about for Mario Draghi? Not at all. The spirit of Schlesinger is back. It's as if the old anti-inflation warhorse had never been away.

At the point of maximum challenge from the present Bundesbank president, Jens Weidmann, to Draghi's London pledge "to do whatever it takes to preserve the euro" (whatever that means), it must have been slightly disconcerting for the ECB chief to find Schlesinger last week re-emerging in news briefings and websites.

The occasion was a uniquely Bundesbank occasion, the 55th anniversary of the central bank's foundation on Aug. 1, 1957, when it replaced the postwar Bank deutscher Länder.

The Bundesbank staged an intriguing joint interview with Weidmann and Schlesinger upholding the bank's stability-first principles and upholding its right to be taken seriously in the councils of Europe. The interview was conducted at the end of June but published only last week.

Schlesinger is nearly twice the age of the 44-year-old Weidmann, who could be his grandson. The two clearly get along very well. As I have pointed out before (see: Bundesbank renationalization under way," May 9, 2011), Weidmann bears a strong resemblance to a younger Schlesinger.

The joint message appeared in the Bundesbank's staff magazine, an organ that is normally devoured by the Bundesbank's employees but attracts no external publicity.

This time, as part of the Bundesbank's newfound attention to communications, it's different. Uniquely, the publication has become a centerpiece of the Bundesbank's website, including in a fully fledged English-language version, and was cited last week by major international newspapers.

Softly spoken Weidmann's uncompromising stance on the Bundesbank's anti-inflation independence, backed up by Schlesinger as the bank's monetary overlord, is of more than mere symbolic importance. Weidmann is putting to one side his nominal extreme-minority position on the ECB governing council.

Significantly, contrary to some published statements, the ECB council took no actual vote on the bond-buying issue at the Aug. 2 meeting; Draghi and Weidmann would prefer it that way.

Mindful that his real power may be outside the council, Weidmann is taking his stance directly to the court of international media and political opinion.

Meaningfully, he said in last week's Bundesbank magazine interview: "If a central bank also has to work against public opinion, things get difficult. ... We are the largest and most important central bank in the eurosystem and we have a greater say than many other central banks in the eurosystem. This means that we have a different role."

In the game of bluff and counterbluff over the future of the euro, neither Draghi nor Weidmann really wishes to find out exactly what that role is. In the dust cloud of ECB ambiguity, the euro remains vulnerable to any perception of bad news.