Top German Banker Sees Light At End of Tunnel

At one of his first major press conferences since taking over as president of the Bundesbank, Axel Weber on Tuesday appeared cautiously optimistic about the German economy. The head of Germany's central bank repeated what he said a few weeks ago when he took office, namely that the economy is on a fragile recovery course. As he put it, the economy is "out of the worst, but it's not quite out of the woods."

Weber said he wasn't worried by a report on Tuesday from Germany's ifo institute which showed a slight dip in business confidence for the month of May. Weber expected economic growth in this year to be around 1.75 percent, spurred largely by high exports and growing investment over the last few years.

But while exports remain high, domestic demand is lagging and threatens to weight down the prospective growth. Weber called on the government of Chancellor Schröder to push through planned reforms in the job market without delay before unemployment implodes in Germany. He said the constant delays in implementing the Agenda 2010 welfare and labor reform packages only served to make consumers uncertain about what the future holds for them.

Rising oil prices or the world geopolitical situation might pose a risk to recovery, Weber acknowledged, but as it stands now, neither pose an immanent danger. "We are monitoring (the oil price rise) as a risk scenario, but we are not particularly worried," he said in Frankfurt.

Europe's biggest and slowest economy?

Weber, who as head of the Bundesbank also sits on the policy-setting council of the European Central Bank, rejected suggestions to cut interest rates as a means of stimulating growth in the euro zone's largest economy. He said the interest rates, at their current level, "are not standing in the way of recovery in Germany and in the euro area... Monetary conditions remain favorable." Despite political pressure, the ECB has stuck to its 2.0 percent interest rate since June 2003.

With a nod to Brussels' view on maintaining budgetary discipline, Weber warned against changing the Stability and Growth Pact which requires countries to keep their deficits below three percent of their GDP. Germany and France have already violated the pact three years in a row, but the EU has held back on punishing them -- an act which has led some public figures to call for a complete rethinking of the guidelines. Weber, an advocate of the Stability Pact recommended instead that Germany cut government subsidies so it can keep its deficit in line with EU deficit rules in 2005.

"International rules have to be respected and cannot be changed at will by the parties concerned," Weber said.

Germany's new chief banker

Weber was named Bundesbank President in April after a scandal forced his predecessor Ernst Welteke to resign. The former chief banker had accepted the gift of a stay in a luxury Berlin hotel from the Dresdner Bank, which the Bundesbank oversees. Welteke had been a career politician in Schröder's party of Social Democrats and was often criticized for his lack of academic understanding of economic issues.

Weber, on the other hand, had little experience in politics before he took up the post. He was a respected professor at the University of Cologne and one of the so-called five wise men who advised the German government on economic matters. Upon taking office, Weber said that he would continue the basic policies of Welteke: keeping interest rates where they are and sticking to the Stability Pact. The question that particularly interests economists is what role Weber will play in setting policy at the European Central Bank.