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ECB bigwig quits

September 9, 2011

The European Central Bank's chief economist has resigned. Jürgen Stark's decision to step down was reportedly due to a disagreement over the bank's policy of buying up EU sovereign debt to try to calm the markets.

Jürgen Stark
Jürgen Stark had opposed ECB bond-buying in the pastImage: picture alliance/dpa

The European Central Bank in Frankfurt confirmed in a Friday afternoon statement that its chief economist and executive board member Jürgen Stark had resigned "due to personal reasons."

The German economist's resignation shook the European markets hours before the end of the week's trading; with Germany's DAX shedding almost two percent of its value in a matter of minutes after the rumors were confirmed. The euro, meanwhile, slid to its lowest level against the US dollar since February.

According to information from Reuters, Stark resigned because he opposed the ECB's relatively new and growing practice of purchasing sovereign bonds of eurozone member states - a policy born out of a desire to protect at-risk economies from increased borrowing costs and insolvency.

Stark made no public statements on Friday, but submitted a commentary to the German daily Handelsblatt. The newspaper released excerpts of the article ahead of its Monday publication, showing Stark to have demanded a "quantum leap" from European governments to tackle sovereign debt, including "far-reaching reforms to decision-making and punitive mechanisms."

Save, don't spend

"We find ourselves in a situation where massive risks to the sustainability of public budgets could undermine financial stability," Stark wrote, while also strongly opposing the recent suggestion from the International Monetary Fund that further government stimulus measures might stop the rot.

"A fiscal stimulus would just increase the debt levels, and therefore up the risks even further," he wrote. "The costs of adjustment would rise markedly in the future because of such a delay in consolidation."

The euro symbol superimposed in front of the ECB headquarters in Frankfurt am Main
The somewhat stable euro took a big drop against the dollar amid the newsImage: Fotolia/interlight

The excerpts released by Handelsblatt, however, did not directly mention his employer's policy of buying sovereign debt from at-risk eurozone countries.

In February this year, the chief of Germany's Bundesbank, Axel Weber, left the ECB in protest at the bond-buying program.

"Stark held the same view of the bond-buying as Axel Weber and the current Bundesbank president," said Manfred Neumann, emeritus professor at Bonn University and former thesis advisor to current Bundesbank President Jens Weidmann. "It is a position that all 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," he told Reuters.

Reticent Germans

Weidmann and Stark were among a group of the ECB's 23-member governing council who opposed last month's decision to reinstate eurozone bond-buying after a 19-week pause. The decision was believed to aim to stabilize borrowing costs for presumed insolvency candidates like Italy and Spain - although the ECB does not publicly announce which countries' debts it is purchasing.

"I think [Stark's resignation] is sending a strong message to the ECB that they are going to have to get out of this," Berlin-based business journalist Andrew Bulkeley told Deutsche Welle. "When Axel Weber resigned from the Bundesbank he was saying: 'OK, you're doing it; now what's your plan to stop doing it and sell these bonds?' The ECB never came up with an answer, but now they're going to have to start providing some of these answers."

Until Greece started to run into financial ruin in 2010, the ECB was not permitted to buy sovereign debt from eurozone members, with such a move deemed to be a conflict of interest.

Bulkeley said that the dips on the financial markets at the close of trade - which were particularly steep in at-risk Italy and Spain - reflected investors' fears that the ECB would soon stop buying these bonds, meaning one fewer purchaser would be available. He also said that there was a wider worry about the direction of the ECB and its loss of key personnel at such a volatile time.

Jörg Asmussen
Unlike Christian Democrat Stark, Jörg Asmussen is a Social DemocratImage: picture alliance/dpa

"This is coming at a time when the wheels are coming off the euro and European financial markets. They have got better things to deal with - they need somebody like Stark, they need people like Axel Weber, they need these guys to help."

The Frankfurt-based European bank was already slated for major change, with President Jean-Claude Trichet set to retire at the end of October - to be replaced by Mario Draghi of Italy.

Critics of the plan have also said that purchasing bonds of at-risk economies could cause national governments to slacken off in their austerity drives, complacently thinking that the ECB will protect them from collapse. Last month, German President Christian Wulff voiced his objection to the policy, saying it could only be tolerated temporarily. Wulff also described the move as "politically and legally questionable," adding that the ECB had "vastly exceeded its mandate."

New face, same policy?

Sixty-three-year-old Stark had been on the ECB's six-member executive board since 2006, presiding over the crucial economics portfolio.

Germany's Jörg Asmussen, state secretary at the Federal Ministry of Finance, is rumored to be the top candidate to replace Stark, but the ECB said on Friday only that it intended to name a successor before the end of the year.

"Stark was the ECB's head economist, he was the guru, so to speak. Asmussen probably won't take up that same position, but he's still going to hold Germany's position against buying these bonds," Bulkeley said.

Author: Mark Hallam (Reuters, AFP, dapd, dpa)
Editor: Nancy Isenson

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