The top German official at the European Central Bank (ECB) resigned unexpectedly on Friday in conflict with the bank’s policy of buying government bonds to combat the eurozone’s debt crisis.
The ECB confirmed executive board member Juergen Stark, the central bank’s chief economist, would leave “for personal reasons” by the end of the year once a replacement was found, after Reuters reported exclusively that he had quit.
The euro fell and shares tumbled in Europe and on Wall Street on the shock development, which laid bare a rift inside the central bank over the handling of the worsening debt crisis, and could undermine German public support for the euro.
While Stark gave no public explanation for his resignation, he sent an article to German financial daily Handelsblatt, for publication tomorrow, in which he says the only solution to the debt crisis is for governments to cut spending.
ECB bond-buying stemmed market contagion to Italy and Spain that threatened to overwhelm the eurozone’s defenses last month, giving governments a breathing space to work on policy solutions to the worst crisis in the single currency’s history.
The hawkish Stark’s departure, almost three years before his term is due to expire in May 2014, may deepen the gulf between the ECB and German guardians of central banking orthodoxy.
A source familiar with the matter said German Finance Minister Wolfgang Schaeuble’s deputy, Joerg Asmussen, a pragmatic civil servant who has been at the heart of financial crisis management, would be nominated to replace Stark on the ECB’s executive board.
Former Bundesbank president Axel Weber, who had been the frontrunner to succeed ECB President Jean-Claude Trichet when he retires at the end of next month, resigned and withdrew from the race in February in protest at the same policy, which critics see as improperly monetizing government debt.
“Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president,” said Manfred Neumann, emeritus economics professor at Bonn University and former thesis adviser to Bundesbank chief Jens Weidmann.
PROBLEMS
“It is a position that all the Germans have. This is a sign of huge problems within the central bank. The Germans clearly have a problem with the direction of the ECB,” Neumann said.
Some economists said it was a sign that the hardliners were in retreat and the ECB was becoming more dovish.
“The last hawk is leaving the sinking ship,” ING analyst Carsten Brzeski said.
Stark was one of four members of the ECB’s policymaking governing council who sources said voted against last month’s controversial decision to revive the dormant bond-buying program and start buying Italian and Spanish debt after the two countries’ borrowing costs ballooned.
Since then the ECB has bought 56 billion euros (US$76.5 billion) in bonds, significantly reducing Italian and Spanish spreads over benchmark German Bunds, on top of the 76 billion euros in Greek, Irish and Portuguese bonds it had bought since May last year.
Stark’s decision means Trichet’s designated successor, Bank of Italy Governor Mario Draghi, will start his eight-year term in November with a mountain to climb to restore the central bank’s credibility in Germany, Europe’s biggest economy.
While most policymakers, including Draghi, declined comment, Austrian ECB governing council member Ewald Nowotny, a policy dove, said the ECB’s basic direction would not be affected by Stark’s departure.
German Chancellor Angela Merkel said Stark stood for a “culture of stability” in the eurozone to which her government strongly adhered.
Two days after the German constitutional court upheld the legality of eurozone bailouts so far, Merkel said that the EU would have to enact treaty changes to strengthen cooperation in the debt crisis.
UNCERTAINTY
The news added to uncertainty over the position of Greece, the country where the euro debt crisis began in late 2009.
A debt swap meant to help Greece avoid default and win time to repair its tattered public finances hung in the balance on Friday with expectations of take-up by private creditors fluctuating amid fierce European pressure on Athens.
Officials expect a take-up rate of above 70 percent but well short of the 90 percent target, which would see 135 billion euros (US$189 -billion) of Greek bonds maturing by 2020 swapped or rolled over in a global transaction.
The head of the Greek public debt management agency said responses had started coming in and looked positive.
However, he said no figure would be given on Friday or next week.
Greece had threatened to cancel the deal unless it got 90 percent participation but is in no position to walk away as it already faces the threat of its EU partners blocking bailout loans if it does not improve its debt-cutting performance.
Germany and its north European allies made private sector involvement one condition for a second rescue of Greece by international lenders, but it is unclear how any shortfall will be met if participation is lower than initially forecast.
Markets are worried not only about the debt swap, but also over an impasse in Athens’ negotiations with the EU and the IMF and the wider impact of the eurozone debt crisis for banks’ solvency.
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