11 June 2019

Financial Times: Jens Weidmann casts a shadow over the ECB

[...] Mr Draghi has transformed the ECB from a descendant of the old Bundesbank into a modern central bank, and from a central bank thinking for a small open economy to one appropriate to a diverse and continental-scale economy. The crucial question then is whether his successor will possess the intellect, flexibility and courage needed to respond to whatever happens. Some of what might happen could indeed be perilous: the world is highly unstable; eurozone inflation is very low; and monetary policy is close to its normal limits. Even today’s slowdown demands action. A worse slowdown might demand heroic action. The next president might have to pull new rabbits out of the hat.

It is doubtful whether any of the candidates meet these high standards. The riskiest by far would be Jens Weidmann, Bundesbank president. Mr Weidmann has opposed many of Mr Draghi’s innovations, including resort to QE. He even testified against OMT before the German constitutional court. The ECB council might be able to force him to do the right thing, in a crisis. But that would be a mad way to run the central bank.

Yet there is an alternative possibility. The one thing that could reconcile Germans to how the ECB must behave is recognition of that reality by a German president. He would have to tell his compatriots some home truths. Most obviously, that inflation has been lower under the ECB than under the Bundesbank. Then he would have to point out that a world of low inflation and generally very low interest rates is not one in which their savings have much economic value.

Finally, such a German president should add that the German private sector has a surplus of savings over investment comparable in scale to that of Japan. It is possible for Germany to have full employment and a budget surplus because Germany has been running a huge current account surplus. That would have been far more difficult if Germany had not been inside the eurozone: a floating Deutsche Mark would surely have appreciated hugely, Germany would now be in deflation, much more of its export-oriented production would have moved out and its monetary policy might be like Japan’s.

In brief, Germany has been a huge economic beneficiary of the euro. A Mr Weidmann who had said that again and again, and had also strongly backed the actions taken by the ECB, could have made a big difference to eurozone politics. Unfortunately, such a Mr Weidmann has not been in evidence. Instead, he has represented and so validated the sceptical German view. If that is what he would do as president, it would be a disaster. If he took the broader view, it would be a blessing. This, and not his nationality, is the issue. There can be no objection to a German president. On the contrary, a realistic and reasonable German president would be a great boon. [...]

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