The top German official at the European Central Bank resigned out of the blue on Friday in conflict with the bank's policy of buying government bonds to combat the euro zone's debt crisis. The ECB confirmed Executive Board Member Juergen Stark, the central bank's chief economist, would leave 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 next Monday in which he said the only solution to the debt crisis was for governments to cut spending.
ECB bond-buying arrested market contagion to Italy and Spain that threatened to overwhelm the euro zone's defences in August, 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.
In Marseille for a G7 summit, German Finance Minister Wolfgang Schaeuble said he regretted Stark's decision but he expected another German, committed to stability policies, would take his ECB seat. Reporters said Schaeuble's delegation seemed to be in a state of serious stress.
A source familiar with the matter said Schaeuble's deputy, Joerg Asmussen, a pragmatic civil servant who has been at the heart of financial crisis management, would 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 monetising 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.
"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."
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.
Trichet made an emotional defence of the bank's performance against German criticism at a news conference on Thursday, angrily saying the ECB's record of inflation fighting in Germany over the last 12 years had been better than the Bundesbank's.
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 programme and start buying Italian and Spanish debt after the two countries' borrowing costs ballooned.
Since then the ECB has bought more than 35 billion euros (30 billion pounds) 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 has bought since May 2010.
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.
