Jens Weidman is probably someone that you have not heard of as the name certainly is not a household word. However, he may be sitting in the most important position that will impact global finance for the next decade. He is the head of the German Bundesbank. Until about a year ago he was a close adviser to Angela Merkel, Chancellor of Germany. Prior to advising Ms. Merkel he worked in the Bundesbank, IMF and in several other financial positions. He is someone with global experience and market knowledge.
Why has he become influential? As the head of the Bundesbank, the central bank of Germany, he has strong influence as to what the German country will, or won’t do, to support or rescue the debt problems of Euro Zone members. Currently, and for nearly a year, Mr. Weidman has stated his position clearly. He believes the European Zone members either need to give up some level of sovereignty over national budgets, or set strict fiscal rules and enforce them. I agree with his position.
The Euro Zone members are acting as if they are independent states without ties when it comes to borrowing money in the markets through bonds but, when trouble starts, such as problems with repayments, these same countries run to the European Central Bank for help. The troubled countries ask for help to solve their problems of overspending.
This is a problem not because the individual country recognized the problem ahead of time and wants to avoid a disaster. It is a problem because global markets, the people each of these countries wants to have buy their bonds, is asking for higher interest rates, yields, because the risk of default is getting higher. How dare they do this? They should just give them the money – right.
If the individual country is unable to take responsibility for overspending, the markets will tell them very quickly. However, by the time this happens the problem is, well a big problem. The country that needs to borrow more does not have the income to pay higher yields. They already have difficulty paying for the existing debt. It is a bit like transferring the balance from a VISA credit card to Mastercard but, the interest rate is higher. All you did was gain time. Unfortunately, time eventually runs out and now the countries are running to the European Central Bank (ECB) for a rescue – more time.
Mr. Weidman’s position is clear. He believes the countries must demonstrate financial stability to the markets otherwise yields will continue to rise as the chance of default rises. (That’s the way it is supposed to work.) If the countries move the debt problem to the ECB it is a transfer, not a solution. In this case, it just spreads the problem across a bigger base in hope to hide the problem.
Mr. Weidman is on good ground with his position as the markets are demonstrating this through yields right now. The problem countries of Spain, Italy and Greece are paying 5.9%, 5.6% and 20.1%, respectively, for debt where Germany is paying 1.7%. The problem is also getting worse, not better, with European debt reaching 89% of GDP.
Not everyone agrees with Mr. Weidman. The President of the ECB, Mario Draghi is in agreement with many others suggesting the central bank should lend more to governments on risky assets to promote economic growth. In the French Presidential race both candidates believe more should be lent to governments with the front runner, Francois Hollande suggesting a rate cut and more lending as a solution. Spain is asking for a re-establishment of the asset purchase program and Italy wants the bond purchase program reinstated. This is on top of the already 40% increase in the ECB’s balance sheet of debt to 3 trillion Euro.
Mr.Weidman does not believe the Bundesbank should buy these high risk assets and is not agreeing to do so without changes in responsibility and decision making. It probably will not be agreed upon by the other countries so maybe Mr. Weidman will be able to pick up the pieces when it breaks.