27 July 2012

Weidmann, Schlesinger review 55 years of the Deutsche Bundesbank and its current role within the Eurosystem

In an interview, Jens Weidmann, President of the Deutsche Bundesbank, and Helmut Schlesinger, former Bundesbank President, discuss i.a. European banking supervision and the biggest challenges facing the Bundesbank.

Weidmann: It is interesting that we are having a similar discussion now in connection with the banking union. Here, too, some quarters are evidently seeking a far-reaching joint solution, but without imposing stricter rules on the other policy areas that are also affected. A genuine European banking supervision can indeed form a major component of closer integration within monetary union. However, such an institutional reorganisation of banking supervision also has to be integrated – into a comprehensive reform of the supervisory regulatory framework and of the respective national scope for economic and fiscal policy. Otherwise, too great a burden will be placed on banking supervision.

What is crucial for political union is the willingness to hand over national sovereignty. Does such a willingness actually exist within the EU?

Schlesinger: This question always takes me back to the start of European unification. At that time, the main objective was quite a different one – namely, to ensure that there would never again be a war in Europe. The plan for a common European army was ultimately blocked by France, even though the loss of sovereignty involved would have been easy to implement. It is actually hard to envisage how a loss of monetary sovereignty could be achieved in the absence of a unified state.

Weidmann: Seeing how reluctant some countries are to relinquish their fiscal policy autonomy – even in return for financial assistance – it is hard to imagine political union being achieved in the foreseeable future.

Mr Schlesinger, should the Bundesbank have fought more strongly against monetary union without a political counterweight in the 1990s?

Schlesinger: All of our demands were fulfilled. But I think we all underestimated just how wide the gulf is in the mindset not only of the political class but also in terms of public opinion in the individual countries concerning the objectives of fiscal policy. I would like to refer you to a chapter by Rudolf Richter in the publication marking the 50th anniversary of the Deutsche Mark (Note: Fifty Years of the Deutsche Mark: Central Bank and the Currency in Germany since 1948).  He writes that the culture of stability in Germany has been able to develop only because it has had the full backing of the general public. If you look at the Maastricht Treaty, the relevant criteria are there. But you won’t find any reference to the Member States having to have the same culture of stability.

Weidmann: Political efforts to use the central bank for policy purposes exist in all countries. However, the public’s stance on this is probably the crucial factor.

Is there a lack of political will?

Weidmann: The founding fathers of the EU treaties evidently took a sceptical view of the political will, and it is precisely for this reason that they made the central bank independent in order to protect it from a lack of or a conflict of political will.  But the central bank must use and maintain this protection. Furthermore, it should be aware that this independence also requires it to respect and not overstep its own mandate. Mr Schlesinger’s examples show that what is politically desirable and what is economically prudent have often not matched up. Whether we're talking about interest rates or some sort of non-standard measures, in the end it always comes down to the central bank being instrumentalised for fiscal policy objectives. However, policymakers thereby overestimate the central bank's possibilities and expect too much of it by assuming that it can be used not only for price stability, but also for promoting growth, reducing unemployment and stabilising the banking system. This pattern occurs again and again; this time it is perhaps even more pronounced than in the past because there is increased doubt among the general public about policymakers’ ability to act, and the central bank is seen as the sole institution that is capable of doing something. In this respect, the central bank is perhaps under even more pressure than in the past –  even though you, Mr Schlesinger, are better able to judge this as you have witnessed all of these periods. Furthermore, in Europe we are faced with some quite different ways of looking at the central bank’s role – not only in politics, but also in the media and on the part of the general public.  If a central bank also has to work against public opinion, things get difficult.

Today it is even harder for the Bundesbank to assert its influence as it is just one of 17 central banks in the Eurosystem. What impact does this have on your work?

Weidmann: Even though what you say is correct in terms of shares of voting rights, I certainly would not say that we are “just” one of 17 central banks. We are the largest and most important central bank in the Eurosystem and we have a greater say than many other central banks in the Eurosystem. This means that we have a different role. We are the central bank that is most active in the public debate on the future of monetary union. This is also how some of my colleagues expect it to be.

Recently, the day after a public hearing before the Budget Committee of the German Bundestag, the headline in the Bild newspaper read “Bundesbank is softening the euro”. Did this discussion on inflation in the press, which was conducted in great depth and lasted for several days, harm the Bundesbank’s status as an “anchor of stability”?

Weidmann: Well, I have not received any complaint from Mr Schlesinger about that. He knew that this headline had no substance. For those acquainted with the Bundesbank it was immediately clear that nothing of any substance was being reported. Of course, it pains me to see how frivolously fears are being aroused, particularly at a time when people are already very uncertain. At the public hearing, the Bundesbank referred in terms of substance to something quite trivial: if Germany, which was once the “sick man” of Europe, is now taking the lead in Europe economically – and the economic situation has now been reversed compared with the first few years of monetary union – then this will, naturally, also have an impact on the inflation rate. However, it is positions after the decimal point that will be affected by this, and next year we shall in any case first of all see prices cooling off. Parallel to this, there was another, almost absurd debate about strengthening the peripheral countries by weakening Germany’s competitiveness. This came about from the belief that the peripheral countries are at risk from deflation. However, if these countries go through adjustment processes which result in decreases in wages and prices, then this constitutes one-off shifts in the wage and price structure and not deflation.

Therefore, Germany does not have to accept inflation rates which broadly unmoor inflation expectations merely to ensure that the average euro-area inflation rate remains just below two per cent. Yet this is exactly what some in the United States and United Kingdom are calling for.   

It is often said that Germany has benefited from monetary union and it therefore has a duty to help.

Weidmann: I think that argument is incorrect. First, counting up the for and against of who has benefited to what extent from monetary union is not helpful. A stable single currency benefits all Member States – some perhaps more than others, but that, too, can change over time. After all, Germany was certainly not considered to be a winner during the first few years of monetary union. Second, when monetary union was established, we agreed on a legal framework which has to be respected: a single monetary policy ensures price stability and each member state is responsible for its own fiscal policy. This is precisely what is expressed in the “no bailout” clause. And third: Germany is already providing large-scale assistance for the peripheral countries, not least as an anchor of stability and as a guarantor of the rescue packages.

Mr Weidmann, in your opinion, what are the biggest challenges that the Bundesbank is facing now and in the coming years?

Weidmann: The crisis requires all our energies. We shall continue to use all of our resources at all levels to stand up for the positions we believe in and to ensure that the monetary union remains a stability union. We shall take on new tasks in the field of financial stability, which we shall have to breathe life into. I am thinking here, in particular, of the national macroprudential mandate, in which the Bundesbank is taking a prominent role. For me personally, it is a quite particular concern that we continue our progress to a culture of openness at the Bundesbank. 

Full interview

© Deutsche Bundesbank