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Cloak-and-dagger, tooth-and-nail at the Bundesbank.

In defending the Bundesbank's independence and in fighting inflation, Vice-President Jurgen Stark, 55, is at his best. On April 7, the former deputy finance minister of the Kohl government took over from Bundesbank President Ernst Welteke, 61, on a temporary basis.

Welteke was forced to take a leave of absence while Frankfurt prosecutors investigated the so-called "Adlon Affair." Welteke is accused of having allowed Dresdner Bank AG--which the Bundesbank supervises--to pay for a 7,661 [euro] stay at the Hotel Adlon for him and his family when he was a keynote speaker at a euro introduction party. After two weeks of relentless criticism and escalating pressures from the Berlin government, a second blow forced Welteke to resign on April 16. German media reported that Welteke also had accepted an invitation from automaker BMW to a Formula One cat" race in Monte Carlo last year. Since BMW runs a commercial bank that the Bundesbank oversees and since the Monte Carlo affair happened after Welteke had signed the European Central Bank's Governance Rules, his position became untenable.

Welteke left voicing bitter criticism of the German government, charging in a statement issued by the Bundesbank that "the disregard for the legally guaranteed independence of the Bundesbank and its institutions goes on."

While the news magazine Der Spiegel broke the Adlon Affair, copies of the hotel bill were sent anonymously to the Finance Ministry in Berlin from--surprise!--a post-box within walking distance of Finance Minister Hans Eichel's offices. Was someone in Berlin trying to get rid of a Bundesbank president who lacked the ethical sensitivity to pay his hotel bill out of his 350,000 [euro] salary?

As acting Bundesbank head, Stark went on the offensive immediately. While the Berlin finance ministry issued calls for Welteke to step down, the Bundesbank's managing board closed ranks as it saw its institutional independence threatened. Right after being nominated, Stark went on television warning Eichel and his aides: "Expectations were expressed which can certainly be seen as an impediment to the functioning and the independence of the Bundesbank."

It didn't take long before the Adlon Affair escalated into a "scandal in a scandal," with Eichel and his influential public relations advisor Klaus-Peter Schmidt-Deguelle being accused by opposition members of the Bundestag of instigating a German Watergate. The outline of the infamous plot was "made in Berlin": First, get rid of Welteke, who has criticized the Berlin government for exceeding the public deficit limits and thereby destroying the European Stability and Growth Pact. Second, move either Eichel's deputy Caio Koch-Weser or deputy economics minister Alfred Tacke--neither known for contesting the will of Chancellor Schroder or Eichel--to the top of the Bundesbank. Third, use the new Bundesbank presidency to prepare the way for large-scale sales of Bundesbank gold in order to finance major education programs that should help to secure Schroder's re-election in 2006. Fourth, by sending Koch Weser or Tacke to the Bundesbank, the Schroder government broadens its options for placing another German at the ECB when its chief economist Otmar Issing steps down in 2006.

Even before Welteke stepped down, the race to succeed him had begun with three serious contenders--Stark, Welteke's deputy who was passed over for the job in 1999 when Welteke was selected; Tacke, Schroder's "sherpa" for the G7 world economic summits; and Caio Koch-Wescr, the current deputy finance minister, who was put forward by Germany in 2000 to head the International Monetary Fund but whose candidacy was vetoed by the United States. Not surprisingly, the conservative opposition party objected to Tacke and Koch-Weser to head the Bundesbank because both have no central bank experience.

A surprise candidate, economics professor Axel Weber, finally emerged in late April as the nominee for Bundesbank chief, putting Stark out of the running for the second time. Weber, a specialist in monetary theory, has been critical of French and German finance ministers for not imposing greater budget discipline.
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Title Annotation:Deutsche Bundesbank
Author:Engelen, Klaus C.
Publication:The International Economy
Geographic Code:4EUGE
Date:Mar 22, 2004
Previous Article:French balance with a strong finish.
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