German Central Bank Warns Of "Incendiary" Monetary Policy
"The euro crisis is certainly not over yet," is how the Bundesbank's Jens Weidmann begins this intriguingly honest interview, adding that, resolution "will take some time." Perhaps his most telling statement comes early on when he explains that "believing that everything is okay now simply because the situation on the financial markets has eased is an illusion and does not help matters," as imbalances remain unresolved. From French un-competitiveness to Italy's potential about-turn on reforms, the outspoken German then goes on to address a critical point: "There are indeed some who see a solution to the crisis in the shape of higher inflation. I would regard such an approach as potentially incendiary. Once you allow inflation, it becomes very difficult to tame. In the short term, our projections show no excessive increase in prices. However, I would caution against underestimating the medium to long-term risks to stability. There must be no doubt that, when the time is right, we will tighten monetary policy."
Interview with Jens Weidmann, President of the Deutsche Bundesbank
The interview was conducted by U. Dönch, J. Quoos und A. Wendt.
Translation: Deutsche Bundesbank
Mr Weidmann, the Bundesbank increased its risk provisioning to €14 billion this week because of the euro crisis. Does that mean you expect the worst is yet to come?
We have been engaged in a three-year process of building up provisions. These reflect the risks of monetary policy and of central bank crisis measures. The euro crisis is certainly not yet over. Resolving the crisis in lasting fashion will still take quite some time.
German finance minister Wolfgang Schäuble takes an entirely different view.Recently, he more or less gave the all-clear, yet you are sending out a new crisis signal.
Our assessment has not changed. We have always made the point that the euro crisis will not be over until the structural problems have been resolved – particularly the lack of competitiveness and the high level of debt. Believing that everything is okay now simply because the situation on the financial markets has eased is an illusion and does not help matters: it reduces the pressure to act to deal with the imbalances that continue to prevail.
How great a danger is there that major countries like France will not stick to their promises to reform? Will France succeed in turning its economy round?
There is no doubt that France has lost competitiveness and world market share and continues to run deficits. Action needs to be taken in these matters. However, I do not see France as a crisis country. Like Germany, France is a heavyweight in Europe and therefore bears a particular degree of responsibility in the European context. It thus has a role in setting an example of adherence to European agreements and procedures.
Italy must be a much bigger worry for you. Reformer Mario Monti has been voted out, and there is a great deal of political uncertainty. Does it still make sense for the European Central Bank to continue pumping billions into the country?
If key political figures in Italy talk about reversing the reforms or even exiting the monetary union, and yields on Italian government bonds rise as a result, this cannot and must not be a reason for central bank intervention. Ultimately, it is a matter of a country’s politicians upholding confidence in the sustainability of its public finances.
In other words, if Italy and its politicians play with fire, they will have to bear the consequences?
To ensure that the monetary union remains a stability union, a key principle was enshrined in the treaties: that each country has responsibility for itself. It is up to the electorate and the government to decide on the direction of national policy, and it is they who must bear the consequences, and not depend on others to bear them. For this reason, extensive mutualised liability and financing by the central bank are prohibited by treaty.
But even the Free Democratic Party parliamentary leader, Rainer Brüderle, is talking openly about the prospect of Italy having to exit the euro.
I have no part in that discussion, nor do I think it is helpful – and the same applies to the comments made in Italy in this respect.
Many European politicians are currently pressing for more crisis assistance from the European Central Bank. How great a danger does this constant political pressure pose to your independence?
This trend towards political influence is not restricted to the euro area. It is a global phenomenon. The central banks have taken on fire-fighting tasks in the crisis and in the process have also blurred the boundary between monetary policy and government fiscal policy. This poses a risk to central bank independence. There is the danger of a loss of confidence in the central banks maintaining their focus on stability.
Many heads of government are expressly calling on you as central bankers to do more and more so that it will be you fighting the fire, not the politicians.
That is indeed the case, and it is not new. But it is far from being right. It was precisely for this reason that, when the monetary union was created, the central bank was established as an independent institution with a clear price stability mandate. One simple reason why calling for central bank action is an easy route to take is that it allows the complex process of political agreement to be avoided. However, some decisions simply have to be made by the politicians, ie in parliament. If the central banks turn into troubleshooters for the politicians, they risk losing sight of their objective, which is to keep prices stable.
What has the euro crisis cost Germany so far? And what billion-euro risks are still on the books?
It is not currently about cost, but about the high level of risk which has been taken on board – partly through direct fiscal assistance, partly through monetary policy measures such as the purchase of government bonds. Ultimately, European taxpayers, and thus German taxpayers as well, are liable for these risks.
The Bundesbank has so far actually earned billions in interest on many of those Greek, Spanish and Italian government bonds.
That is true. But this interest income is only so high because the risks we have assumed are also so large. High returns generally go hand in hand with a high level of risk. That applies equally to government bonds on our balance sheet.
The Bundesbank isn’t a hedge fund, is it?
No. Nor is it the task of a central bank to generate profits or to engage in particularly risky transactions with a view to the potential earnings. Our job is to safeguard monetary stability. Having a higher level of risk on its balance sheet is clearly unavoidable for a central bank in a crisis. Nonetheless, we are opposed to any extensive mutualisation of sovereign and financial system solvency risks via our balance sheet. This risks overstretching our mandate.
Should Germany do more to help weak euro-area countries? For instance, by increasing wages and exporting less – as called for by some politicians and experts generally to the left?
This approach will not resolve the problems and in the end will help no one. The Bundesbank has carried out model calculations on this. The result of our calculations was that, if Germany reduces its competitiveness vis-à-vis other euro-area countries – for instance, by allowing wages to rise faster than productivity – then there is a danger that, while output and employment fall in Germany, no positive effect will be registered in the crisis-hit countries. Europe is not an island. The euro area needs to become more competitive as a whole within the global marketplace.
Nonetheless, in Germany, too, there are increasing calls for significant wage increases ...
German employers and trade unions have acted very responsibly in recent years. That has definitely helped to keep our unemployment low. I assume that this course will continue to be pursued. However, with strong employment figures and a favourable macroeconomic picture, in the near future wages in Germany will most likely rise to a greater extent than in most other euro-area countries.
Even if Germany is doing well – at the moment.How urgently do we need a new reform offensive – an “Agenda 2020”?
We should take care at all events not to make the mistake of becoming complacent and jeopardising what has already been achieved. Germany is still facing major challenges. One of the biggest is the ageing population. It is therefore important that we ensure our social insurance systems and labour market are properly equipped for this in good time.
Is the government listening to you on this?Or would you like more backup?
I believe that my voice is heard, as President of the Bundesbank. Whether the advice of the Bundesbank is always taken to heart is another question. However, politicians have to make these decisions at the end of the day, and rightly so.
We will continue to try to persuade people with our arguments. And my impression is that our policy focus on stability enjoys broad support with the German public.
No wonder, as people ultimately have to ask what danger the euro crisis poses to their savings, do they not?
We take these concerns very seriously. The interest to be earned on very safe financial investments is currently somewhat lower than the rate of inflation. However, that is not a normal state of affairs, it is a consequence of the crisis. Interest rates will return to normal after the crisis comes to an end. We, as the central bank, continue to have the task of keeping prices stable and thus also ensuring that inflation does not eat away at people’s savings.
Lots of politicians take a different view. They would prefer to alleviate the crisis and the debts by way of higher inflation.
There are indeed some who see a solution to the crisis in the shape of higher inflation. I would regard such an approach as potentially incendiary. Once you allow inflation, it becomes very difficult to tame. In the short term, our projections show no excessive increase in prices. However, I would caution against underestimating the medium to long-term risks to stability. There must be no doubt that, when the time is right, we will tighten monetary policy.
Is fear of inflation already driving too many people into buying shares and property? Is there a danger here of speculative bubbles?
There is no doubt that the low-interest rate environment and uncertainty about future prospects are having an effect on many people’s investment decisions. However, I do not see any speculative bubbles at the moment in Germany. Share prices need to be evaluated in the context of enterprises' earnings expectations. Rising prices on the property market do not become problematic unless a huge increase in mortgage lending further fuels the demand for property. We do not see this at the moment. However, in future the Bundesbank will collect more data on critical sub-markets – for instance, on property prices in the major urban centres. You can rest assured that we will be watching developments very closely indeed.
A lot of people outside Germany regard our fears of inflation as irrational or even hysterical. Are they?
It is anything but irrationality or German crankiness. At the European Central Bank we agreed on a clear definition of price stability: for us, price stability means an inflation rate of below, but close to, two per cent over the medium term. After the high inflation rates in the 1970s and 1980s, ever more countries have come to recognise that price stability does not hamper economic growth but fosters it.
Your single-minded approach has engendered what almost amounts to a campaign against you outside Germany: it is said you are isolated at the European Central Bank. And US President Barack Obama is even supposed to have asked contemptuously, “Who is this?”. How much has this affected you?
There is certainly no shame in having the US President respond to my positions. In fact, it demonstrates that our arguments are discussed and the Bundesbank is taken seriously. The euro area is still stuck in a crisis and we are struggling to find the right answers. The Bundesbank advocates a stability-oriented position and regards it as an error to overload monetary policy by expecting it to fulfil too many tasks.
Does Germany speak with one voice at the ECB, or would you like more backup from the German Member of the Governing Council Jörg Asmussen?
It would be a misunderstanding to assume that the ECB is about national interests – German, French, or any others. We are tasked with operating monetary policy for the euro area as a whole. It would be a dangerous development to distinguish between specific German, French or other interests in this. It is precisely for this reason that I have called for a clear separation of European monetary policy from the tasks of national economic and fiscal policy. If we do not respect this separation, then the issue of representing national interests does actually arise.
Does Germany’s strength and economic success make negotiating more difficult for you?
Even if Germany has come through the economic crisis better than many others, it would be a mistake to take an arrogant or presumptuous attitude. However, Germany is an example of how structural reforms ultimately pay off.
To what extent have you benefited from working closely with Federal Chancellor Angela Merkel for many years?
It certainly does no harm to be familiar with how politics works in Berlin. I learnt a lot from working with the Chancellor and found it personally rewarding. However, as President of the Bundesbank, I have a totally different job to the one I had in the Chancellery.
How close is the contact between you now?
The Federal Chancellor and the President of the Bundesbank are connected through various formal channels. For instance, I attend Cabinet meetings when the Federal budget is being discussed. And I advise the Chancellor in matters of monetary policy. We have an intensive exchange of ideas.
You are talking about discussion between the President of the Bundesbank and the Federal Chancellor. But how closely do Angela Merkel and Jens Weidmann communicate as people?
We have a personal relationship built on trust. That makes it easier to discuss delicate topics, too, even if one’s opinions sometimes differ.