The honeymoon is over for Mario Draghi.
Four months after he took over as president of the European Central Bank, the Italian has run into resistance from the Bundesbank – potentially sowing further doubt in markets about the ECB's freedom to act if the euro zone debt crisis drags on or escalates.
A letter from Jens Weidmann, Bundesbank chairman, taking a swipe at Mr. Draghi was leaked on Wednesday night, hours after the ECB announced a second batch of three-year cheap loans to banks.
The leak is being seen in some circles as an attempt to undermine the ECB president and his flagship policy of so-called longer-term refinancing operations (LTROs) that have helped ease market tensions.
"The letter was only written so that it could be made public. And it's no accident that it came just after the LTRO," said one euro zone central bank official.
Mr. Weidmann told Mr. Draghi the ECB needed to think again about its decision in December to accept a wider variety of collateral from borrowing banks – something that paved the way for 800 banks to borrow €530-billion ($695-billion Canadian) on Wednesday – and about the wider risks being stored up in the financial system. The letter was reported by the Frankfurter Allgemeine Zeitung, an influential newspaper seen as sympathetic to Bundesbank economic orthodoxy.
The Bundesbank on Thursday played down the significance of the letter as an exchange of views between Mr. Draghi and Mr. Weidmann about imbalances in the euro zone's cross-border payment system. German reservations about some crisis measures are no surprise for Mr. Draghi, who has his own concerns about the ECB being forced to take up too much of the burden of euro zone reforms.
But the dispute is bound to invite focus on the relationship between two men who matter so much in euro zone efforts to solve the financial crisis.
Jean-Claude Trichet, Mr. Draghi's predecessor, saw his efforts to combat the crisis hampered by the public opposition of Axel Weber, the former Bundesbank president. Mr. Weber believed that one of Mr. Trichet's signature policies – the buying by the ECB of Greek and other euro zone government bonds on the secondary market – was uncomfortably close to breaking the taboo that the ECB should not directly finance euro zone member states.
Partly as a result, financial markets had little faith that Mr. Trichet could bring the ECB's full firepower into play to buy bonds – hampering the success of the policy. Mr. Weber abruptly quit as Bundesbank president, giving up the good chance he was seen to have had of becoming Mr. Trichet's successor.
Germany's is only one voice on the ECB governing council. But the Bundesbank, as the representative of euro zone's biggest economy – and the country with the deepest pockets to help solve the crisis – is vital to ECB policy decisions.
Keeping Germany on board is therefore essential for Mr. Draghi. But Mr. Weidmann also has the task of persuading the German public that the Bundesbank, through the ECB, is acting in its best interests.
"The Bundesbank is not keen on extending monetary policy into areas of quasi-fiscal policy. But if you want to keep the euro area going sometimes you have to take decisions that you wouldn't in other environments. This is the world they are in," says Jürgen Michels, senior euro area economist at Citi.
"It is not new that Weidmann has been unhappy with some of the ECB's non-standard measures. These LTROs may be better in his eyes than bond buying . . . but that doesn't mean he thinks it is a good choice."
Mr. Weidmann's unease is likely to be widely shared on the ECB's governing council, says Mr. Michels.
With Mr. Draghi and Mr. Weidmann each less than a year into an eight-year mandate as the leaders of their respective institutions, there is every chance of further disagreements on how to steer through the crisis.
"Why does the Bundesbank feel that agenda items for the ECB governing council need to be put out in public first?" asked one economist. "Some of the intricacies of monetary policy are not well suited for tabloid debates. It is very concerning if they are now bringing these issues out to the general public via leaks."