Fingerboning Escalates: Buba Strikes Back To Draghi OpEd With Weidmann Interview
The first shot in the fingerboning wars (a key step up from mere jawboning) has barely been fired following Draghi's earlier OpEd in Zeit (posted here in its entirety), when the Bundesbank already had its response ready for print in the form of yet another interview with its head, Jens Weidmann, who says nothing new or unexpected, but merely emphasizes that no matter how loud the chatter, how empty the promises, or how hollow the bluffing, Germany's response continues to be, especially after today's higher than expected inflation across the country, 9, 9 and once again, 9. Perhaps the most notable part of the interview is Weidmann's comparison between the ECB and the Fed, and why one is allowed to monetize bonds, while the other shouldn't be: "The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe....When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks." Of course, when the wealth of the status quo is at risk, such trivialities as democracies are promptly brushed by the sideline...
'Too Close to State Financing Via the Money Press'
SPIEGEL: Mr. Weidmann, US President Barack Obama reportedly asked German Chancellor Angela Merkel for your phone number. Has he already called you?
Weidmann: I haven't received a call from President Obama. I occasionally talk on the phone with US Treasury Secretary Timothy Geithner, though. It's an important part of my job to promote the positions of the Bundesbank during conversations with monetary and financial policy makers from around the world.
SPIEGEL: That doesn't appear to have been particularly fruitful. In all Western capital cities, from Washington to London, and from Paris to Rome, you are regarded as the man who wants to destroy the euro. Is this allegation justified?
Weidmann: No, not at all. I want to help ensure that the euro remains a stable currency. The framework for this is laid out primarily by the Maastricht Treaty, with its rules and conditions for European financial and monetary policy. I take that as my yardstick.
SPIEGEL: But the framework doesn't work anymore.
Weidmann: The framework has been stretched and, in some cases, disregarded. But as long as the political consensus is lacking and a new framework -- such as a genuine political union -- has not been approved, we will have to adhere to what has been agreed. One of the purposes of the Maastricht rules is to prevent the consequences of poor budgetary policy from being passed on to others. With 17 countries that insist on their sovereignty in budgetary matters, you need such rules, otherwise there's no incentive for sound management. Consequently, at least for the time being, we have to make a concerted effort to improve the Maastricht framework and make it valid again.
SPIEGEL: The governments of the European Union take a similar view and have approved the fiscal pact, which will allow Brussels to more effectively monitor individual national budgets. Is this the right approach?
Weidmann: It's definitely a step in the right direction, but that alone is not enough. The causes of the crisis lie in the high level of indebtedness, the lack of competitiveness of some member states and, last but not least, the lost confidence in the architecture of the monetary union. These fundamental problems must all be tackled rigorously, without hesitation, and with perseverance. This will contribute to the cohesiveness and credibility of the monetary union.
SPIEGEL: But that's already happening. Government spending is being reduced and reforms are being introduced across Southern Europe, but the financial markets don't seem to recognize this progress and are pushing up interest rates on sovereign bonds to dizzying heights. Why are you opposed to European Central Bank (ECB) President Mario Draghi's plans to purchase large quantities of Southern European sovereign bonds to ease the situation?
Weidmann: I was already critical of the sovereign bond purchases that have been made to date -- and I was by no means alone in that respect. Such a policy is too close to state financing via the money press for me. The central bank cannot fundamentally solve the problems this way. It runs the risk of creating new problems.
SPIEGEL: Isn't it necessary to occasionally break dogma to prevent something worse from happening?
Weidmann: It's not about dogma. It's about reinstituting confidence during a crisis of confidence, and it's about key monetary policy lessons from the past.
SPIEGEL: Now you're going to refer to the German hyperinflation of 1923 again.
Weidmann: No, lessons from European postwar history are reflected in the Maastricht Treaty. During the 1970s, the central banks of many Western industrialized nations were chained to economic and fiscal policies. The idea was that it's better to have 5 percent inflation than 5 percent unemployment. This resulted in inflation and unemployment rising simultaneously. Based on such experiences, the Eurosystem (ed's note: the ECB and the central banks of the euro-zone members) was aimed solely at the objective of achieving monetary stability, in accordance with the traditions of the Bundesbank.
SPIEGEL: Do you mean that if the rest of Europe were to follow the German example then everything would be fine?
Weidmann: Not at all, it has to do with successful monetary policy principles, and it just so happens that the Bundesbank in particular has apparently succeeded in building up an enormous amount of confidence. It has proved effective for a central bank to remain independent of financial policy and not finance government budgets. These principles are not an end in themselves -- rather, they are designed to prevent the central bank from running the risk of neglecting its key mission: keeping prices stable. In the 1970s, a number of countries that are now members of the monetary union experienced double-digit inflation. Remember the story of the Banca d'Italia: how hard it had to fight to free itself of the clutches of the Finance Ministry, and how this was then rightly celebrated as a great success.
SPIEGEL: The Bundesbank has already purchased sovereign bonds once in the past, when things got tight.
Weidmann: That was also during the 1970s. The extent of these purchases was smaller than elsewhere, and the government debt was significantly lower. Nevertheless, the Bundesbank apparently recognized this as a mistake, which it subsequently corrected.
SPIEGEL: That may have been the right policy for that point in time. But there is currently no sign of inflation anywhere in Europe, and practically every politician in Europe is calling for support from the central bank. Doesn't that give you pause?
Weidmann: I also see no immediate threat of inflation. But if monetary policy allows itself to be used as a comprehensive political problem solver, its real objective threatens to recede increasingly into the background. Stable prices not only ensure that the market economy works better. They also create a foundation that companies looking to invest can use to make reliable calculations. They protect the financial assets of savers. They ensure that people can still live from their income tomorrow. In that respect, a stability-oriented policy is the best social policy.
SPIEGEL: That's no different in the US. Nonetheless, to combat the financial and economic crisis, the US Federal Reserve has acquired large quantities of US government bonds without causing much concern. Doesn't that influence your thinking at all?
Weidmann: The comparison is misleading. The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe.
SPIEGEL: How so?
Weidmann: When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks. Europe is proud of its democratic principles; they characterize European identity. That's something else that we should bear in mind.
SPIEGEL: Your colleague at the ECB, Jörg Asmussen, with whom you studied at university and worked together for the German government for a long time, says "stability policy" is about not allowing any doubt whatsoever to arise concerning the currency and its continued existence. Would you say he's right?
Weidmann: I totally agree with Jörg Asmussen that no doubt can be allowed to arise concerning the character of the euro as a stable currency and its continued existence. This is precisely why we shouldn't act according to the motto "necessity knows no laws." There are good reasons why we have clearly defined, separate areas of responsibility. The central bank is responsible for monetary stability, while national and European politicians decide on the composition of the monetary union. It wasn't the central banks that decided which countries are allowed to join the monetary union, but rather the governments.
SPIEGEL: Are you implying that some member states would have to leave the euro zone under certain circumstances?
Weidmann: If the central bank were obliged to guarantee that member states remain in the euro zone at all costs, it could come into conflict with its key mission of maintaining price stability. I also don't see how it's possible to fundamentally rule out that a sovereign member state might decide to leave the monetary union.
SPIEGEL: The European treaties make no provisions, though, for a country to leave the monetary zone. Doesn't that have to change?
Weidmann: European politicians have been discussing for quite some time now what would happen if countries don't keep to the terms of their agreements …
SPIEGEL: ... namely, they would receive no more aid money and would thus de facto be forced to leave the monetary union.
Weidmann: If it came to that, the central bank would be in no position to do anything to prevent that from happening, for example by plugging the shortfall in financial aid.
SPIEGEL: You are asking a great deal of politicians. Isn't it fair if the central bank also makes a contribution and is prepared to purchase sovereign bonds, as ECB President Draghi has proposed? After all, this is merely intended as a temporary measure.
Weidmann: That's the hope. But it will be extremely difficult to close that door again, once it's been opened. The bonanza from the central banks would raise expectations (that it would keep happening) and result in a collectivization of risks.
SPIEGEL: Didn't we already reach that stage a long time ago? Former German Foreign Minister Joschka Fischer of the Green Party says that it's long since become reality, and Carsten Schneider, a finance expert for the center-left opposition Social Democrats (SPD), says that Germany's euro-zone risk has now reached €1 trillion ($1.25 trillion).
Weidmann: I don't want to comment on individual calculations here. In any case, it's true that Germany, as well as many other countries, has taken on considerable risks in the process of stabilizing the euro zone. In return, the countries in the fiscal bailout programs have committed themselves to painful reforms. Financial aid in return for reforms -- Europe's bailout policies are taking the right approach here, at least in principle. But it only works if the underlying problems are really tackled, and if the programs are designed and monitored in such a way that people don't lose sight of budgetary discipline.
SPIEGEL: Your analysis is based on the assumption that the financial markets always act rationally during the euro crisis. But that hasn't been the case. When Spain presented a program to bail out the banks to the tune of €100 billion, interest rates on bonds subsequently rose. But when ECB President Draghi said three cryptic sentences, yields plummeted.
Weidmann: That doesn't have to be irrational. No one denies that the central bank has the power to exert short-term influence over the markets. But the central bank is not omnipotent. Remember the euphoric op-eds that were published when the Eurosystem purchased sovereign bonds for the first time? Or how the markets cheered the liquidity assistance provided by the central bank for European banks last winter? But we all know that such actions do not solve the fundamental problems. Our actions are based on trust. Doing more and more does not always engender more trust. Over the long term, the central bank can only preserve trust if its actions conform to the mandate that it has been entrusted with.
SPIEGEL: You already said some time ago that the central bank had pushed its mandate to the limit. Will Draghi's new plans cause it to overstep this limit?
Weidmann: At any rate, I would like to avoid seeing monetary policy fall under the dominance of fiscal policy.
SPIEGEL: Our question is rather whether Draghi's plans are compatible with the current treaties and thus legal.
Weidmann: As a central bank president, I prefer to argue along economic lines. I don't want to comment on legal opinions here. What's important to me is taking a well-founded position that is sustainable in the long term. Moreover, we shouldn't underestimate the danger that central bank financing can become addictive like a drug.
SPIEGEL: But Draghi only wants to provide money if a country submits to a strict reform program. Isn't that a way to provide assistance without writing a blank check?
Weidmann: At first glance, this of course looks like a good idea. But at second glance, it becomes clear that it leads to coordinated actions between the government rescue funds and the central bank. This results in a linking of fiscal and monetary policy.
SPIEGEL: According to the plans, the ECB would only intervene if certain interest rate ceilings were exceeded -- independent of what politicians say. That would make the rules clear.
Weidmann: I won't report here on ongoing discussions. Determining interest rates for sovereign bonds in the ECB Governing Council would be, at least for me, a controversial idea.
SPIEGEL: You are currently very isolated with this opinion on the ECB Governing Council, in which the heads of the central banks decide on monetary policy.
Weidmann: I can hardly imagine that I'm the only one who feels uncomfortable with this.
SPIEGEL: Many of your central bank colleagues, though, appear increasingly irritated by the endless objections of the Bundesbank. ECB head Draghi recently publicly named you as an opponent of his plans. Isn't that breaking a taboo?
Weidmann: On the contrary, I see transparency as important in the current situation. We central bankers are now operating in a gray zone and an increasing number of fundamental issues are coming to the fore. So we have to be prepared to publicly comment on the positions that we take on the council.
SPIEGEL: Until now, it was seen as taboo to comment on internal discussions in public.
Weidmann: The ECB Governing Council is not a politburo. In the US, the minutes of Federal Reserve sessions are even published.
SPIEGEL: Can you at least be certain that the German government stands behind you on this issue?
Weidmann: I support the positions that I believe are appropriate as the Bundesbank president and a member of the ECB Governing Council. In doing so, I don't take my cue from the German government's position. That's part of being independent.
SPIEGEL: Even members of governments such as Finnish Prime Minister Jyrki Katainen are now publicly questioning whether the monetary union has a chance of being saved this way. Has the euro rescue failed?
Weidmann: I see no reason for such fears. The heads of government of the euro zone have just recently expressed their clear commitment to the euro, and I am confident that they are aware of their responsibilities and will take appropriate action. Ireland and Portugal have already made remarkable progress with their reforms. I also view the initiatives in Spain and Italy as positive. Fiscal rescue mechanisms are available for emergencies, and politicians can decide on their structure and volumes. They can, in the correct order, take additional steps toward integration. All of this is doable. What I don't agree with is that some people are conveying the impression that in the crisis only the central bank can prevent a supposedly critical increase in interest rates. The best way to reduce interest rates over the long term is to decisively implement promises and agreements.
SPIEGEL: Things are looking rather bleak, though, in the country where the euro crisis started. Next month, the troika of the European Commission, the International Monetary Fund (IMF) and the ECB will decide whether to approve the next tranche of aid for Greece. Does this country still have a chance, in your opinion?
Weidmann: Let's wait for the troika's report first.
SPIEGEL: What will happen if the inspectors come to the conclusion that Greece has neglected the agreed-upon austerity measures? Will we then have to allow the country to go bankrupt?
Weidmann: That is a decision to be taken by the member states that are providing assistance and by Greece itself. It has many facets, not all of which are economic. Indeed, it also certainly plays a role that there should be no additional loss of confidence in the framework of the monetary union, and that the economic conditions of the rescue programs should retain their credibility.
SPIEGEL: Why is that?
Weidmann: Otherwise I doubt that the leader of another country in the program could convince his parliament to support additional austerity measures.
SPIEGEL: You appear to be the last representative of German ideas of stability on the ECB Governing Council. Did you know what you were getting yourself into when you assumed your current position last year?
Weidmann: I knew the situation that awaited me. But I'm convinced that it's worthwhile speaking out in favor of monetary stability and to keep a focus on the long-term success of the euro.
SPIEGEL: At the moment you are really taking a beating, though. Will you end up resigning from the ECB, just like Bundesbank officials Axel Weber and Jürgen Stark, who quit in protest over the bond-buying program?
Weidmann: I can carry out my duty best if I remain in office. I want to work to make sure the euro stays as strong as the deutsche mark was.
SPIEGEL: Mr. Weidmann, thank you for this interview.