“The central banks are not omnipotent”
Interview with Dr Jens Weidmann, President of the Deutsche Bundesbank, with the magazine Der Spiegel, published on 2012-08-27
Mr Weidmann, it is said that US President Obama recently asked Chancellor Merkel for your telephone number. Has he called you yet?
I haven’t received any phone call from President Obama. I do occasionally speak on the phone with US Treasury Secretary Timothy Geithner. It’s an important part of my duties to make the case for the Bundesbank’s positions when speaking to monetary and fiscal policy-makers around the world.
But these efforts don’t seem to be bearing much fruit. In all the Western capitals, from Washington to London, from Paris to Rome, you are known as the man who wants to destroy the euro. Is this accusation justified?
No, absolutely not. I want to play a part in safeguarding the euro as a stable currency. The framework for this comprises, above all, the Maastricht Treaty with its rules and conditions for European fiscal and monetary policy. That is what I go by.
But the framework isn’t working any more.
The framework has been stretched, in some cases it has been ignored. But as long as there is no political consensus and no new framework – such as a genuine political union – has been adopted, we have to stick by what has been agreed. Amongst other things, the Maastricht rules are intended to prevent the consequences of poor fiscal policy being transmitted to others. When there are 17 countries insisting on sovereignty in fiscal matters, you need such rules, otherwise there's no incentive for sound management. That is why, for the time being, we have to make careful improvements to the Maastricht framework and restore its validity.
The EU governments take a similar view and have approved the fiscal compact, which allows Brussels to monitor national public finances more effectively. Is this the right way forward?
It 's definitely a step in the right direction, but on its own this isn’t 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 loss of confidence in the architecture of monetary union. These fundamental problems must all be tackled systematically, unhesitatingly and with perseverance. This will serve to uphold the cohesiveness and credibility of the monetary union.
But that's already happening. Governments throughout southern Europe are cutting back spending and introducing reforms, but the financial markets are failing to recognise this progress and are driving up sovereign bond yields to dizzying heights. Why do you oppose European Central Bank (ECB) President Mario Draghi’s wish to buy up large quantities of southern European government paper to ease the situation?
I was critical of previous sovereign bond purchases – and nor was I alone in this. In my view, such a policy comes too close to state financing via the printing press. The central bank cannot get to the root of the problems in this way. It runs the risk of creating new problems.
Doesn’t dogma sometimes have to be broken to prevent something worse from happening?
It's not about dogma. It's about rebuilding confidence during a crisis of confidence, and it's about key monetary policy lessons learnt from the past.
Now you're going to bring up German hyperinflation of 1923 again.
No, the Maastricht Treaty draws on lessons learnt from European post-war history. During the 1970s, the central banks of many Western industrialised nations were held hostage to economic and fiscal policies, the idea being that 5 percent inflation is preferable to 5 percent unemployment. This led to inflation and unemployment rising simultaneously. Based on such experiences, the Eurosystem was geared solely to the objective of monetary stability, which is what the Bundesbank has always stood for.
Are you inferring that what’s good for Germany is good for everyone else?
Not at all, it’s a question of successful monetary policy principles, and the Bundesbank – it just so happens – seems to have succeeded in garnering a great deal of trust. It has paid off for a central bank to remain independent of fiscal policy, and not to finance government budgets. These principles are not an end in themselves; they are intended to prevent the central bank from running the risk of neglecting its main task: keeping prices stable. In the 1970s, a number of countries that are now members of the monetary union saw double-digit inflation rates. I would remind you of the Banca d'Italia – the battle it had to free itself of the embrace of the Finance Ministry, an achievement it was then rightly able to celebrate as a great success.
The Bundesbank purchased sovereign bonds once in the past, when things got tight.
That was also in the 1970s. But the size of these purchases was smaller than elsewhere, and the government debt was considerably lower. Nevertheless, the Bundesbank evidently realised that that was a mistake, which it subsequently corrected.
That may have been the right policy at that time. But there is currently no sign of inflation anywhere in Europe, and just about every European politician is calling for support from the central bank. Doesn't that make you stop and think?
Nor do I see any immediate threat of inflation. But if monetary policy allows itself to be used as an all-purpose political problem solver, the danger is that its real objective will increasingly take a back seat. Stable prices not only ensure that the market economy works better. They create a basis for companies wanting to invest to make reliable calculations. They protect the financial assets of savers. They ensure that people will still be able live on their income tomorrow. Regarded in this light, stability policy is the best social policy.
That's no different in the US. And yet the US Federal Reserve has bought large quantities of US government paper to combat the financial crisis, without causing very much hand-wringing. Doesn't that affect your thoughts on the matter?
The comparison is flawed. The Fed is not bailing out a country that is in difficulty. Nor is it redistributing risk among the taxpayers of individual countries. It's buying the bonds of a central government with a strong credit rating. It doesn't go near Californian bonds or bonds of other US states. That's altogether different from the position in Europe.
How do you mean?
When the central banks of the euro area buy the sovereign bonds of individual countries, these bonds end up on the Eurosystem’s balance sheet. Ultimately, it’s the taxpayers of all other countries who are liable for that. In democracies, parliaments ought to decide on such a far-reaching mutualisation of risks, not the central banks. Europe is proud of its democratic principles. They are a key part of the European identity. That is another thing we should bear in mind.
Your colleague at the European Central Bank, Jörg Asmussen, whom you studied with at university and worked with for the German government for a long time, defines stability policy as not allowing the slightest doubt to arise about the currency and its continued existence. Do you think he's right?
I fully agree with Jörg Asmussen that no doubts must be allowed to arise concerning the nature of the euro as a stable currency and its continued existence. That is precisely why we should not act according to the adage “necessity knows no law”. We have a clear division of responsibilities, and for good reason. Monetary stability is the central bank’s responsibility, while that of national and European politicians is to decide on the membership of the monetary union. It wasn't the central banks that decided which countries were admitted to the monetary union, but the governments.
Do you mean to imply that some member states must leave the euro area under certain circumstances?
If the central bank were obliged to guarantee that member states remain in the euro at any price, it could come into conflict with its main task, that of maintaining price stability. I, too, do not see how it can be fundamentally ruled out that a sovereign member state might decide to exit the monetary union.
Yet the European treaties make no provision for a country’s exit from the currency zone. Would that have to be changed?
For a while, now, European politicians have been discussing what would happen if countries did not stick to the agreements …
They would receive no further financial assistance and so would de facto be forced to exit.
If it came to that, the central bank would not be allowed to do anything to prevent it, for example by making up for the financial assistance the country did not receive.
You are asking a great deal of politicians. Is it not right and fair that the central bank should also do its bit and agree to purchase a limited quantity of sovereign bonds, as ECB President Draghi has proposed? After all, this is envisaged as a purely temporary measure.
That's the hope behind the proposal. But it will be very difficult to close the gate once it's been opened. This windfall from the central banks would give rise to addictive tendencies and result in the mutualisation of risks.
Have we not had a debt union for a while, now? Former German Foreign Minister Joschka Fischer says that it long since became reality, and Carsten Schneider, a budget expert with the Social Democrats (SPD), puts Germany's euro-area risk at €1 trillion ($1.25 trillion).
I do not wish to comment on specific calculations. However, it is true that Germany, and many other countries besides, has taken on considerable risks in efforts to stabilise the euro area. In return, the countries in the fiscal bailout programmes have committed to implement painful reforms. Financial aid in return for reforms – Europe’s bailout policy is following the right approach in principle. But it will only work if the underlying problems are genuinely got to grips with, and if the programmes are designed and monitored such that budgetary discipline is not forgotten.
Your analysis is based on the assumption that the financial markets always behave rationally during the euro crisis. But that is not the case. When Spain puts forward a €100 billion programme to bail out the banks, bond yields rise. But three cryptic sentences from ECB President Draghi send yields crashing.
That doesn't have to be irrational. No one is denying that the central bank has the power to exert short-term influence over the markets. But the central banks are not omnipotent. Do you remember the euphoric comments that were made the first time the Eurosystem bought sovereign bonds? Or how the markets applauded the liquidity assistance that the central bank provided for European banks last winter? But we all know that measures like these do not solve the fundamental problems. Our actions are based on trust. Doing more and more does not necessarily create more trust. In the long term, the central bank can only maintain trust if its actions are consistent with the mandate bestowed upon it.
You said some time ago that the measures taken by the central bank had pushed its mandate to the limit. Will Draghi's new plans push it beyond the limit?
I would at least like to avoid seeing monetary policy dominated by fiscal policy.
Our question is rather whether Draghi's plans are consistent with the current treaties and therefore legal.
As a central bank president, I prefer to argue from an economic standpoint. I will not comment on legal aspects here. It is important to me that we adopt a well-founded position that is sustainable in the long term. What is more, we should not underestimate the risk of central bank financing becoming addictive like a drug.
But Draghi only wants to provide money if a country undergoes a strict reform programme. Isn't that a way of providing assistance without writing a blank cheque?
At first glance, this does look like a good idea. But look more closely and it clearly all boils down to coordinated actions between the government bailout funds and the central bank. The result is to link fiscal and monetary policy.
According to the plans, the ECB would only intervene if specific yield caps were exceeded – irrespective of what politicians say. That would make the rules clear.
I won't talk here about ongoing discussions. At least as far as I am concerned, the ECB Governing Council setting sovereign bond yields is a problematic idea.
At the moment you stand very much alone with this opinion on the ECB Governing Council, in which the heads of the central banks decide on monetary policy.
I hardly imagine I'm the only one who is uncomfortable with this idea.
But many of your central bank colleagues appear increasingly irritated by the Bundesbank’s constant vetos. ECB President Draghi recently named you publicly as an opponent to his plans. Isn't that breaking a taboo?
On the contrary, I believe transparency is important in the current situation. We central bankers are operating in a grey area at the moment, and fundamental issues are increasingly on the agenda. That is why we have to be prepared to publicly explain the positions that we take on the Governing Council.
Up until now, commenting on internal discussions in public simply wasn’t done.
The ECB Governing Council is not a politburo. They even publish the minutes of Federal Reserve sessions in the US.
Can you at least be certain that you have German government backing on this issue?
I support the positions that I, as the Bundesbank president and a member of the ECB Governing Council, believe to be right. I don't go by the German government's position. That's part of what being independent is about.
Even members of governments such as Finland’s prime minister Jyrki Katainen are now asking in public whether the monetary union can be saved this way. Has the euro rescue failed?
I see no reason for such fears. The euro-area heads of government only recently expressed their clear commitment to the euro, and I have no doubt 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 consider the steps taken by Spain and Italy to be positive. Government bailout mechanisms exist for emergencies, and politicians can decide on their structure and the amounts they involve. They can, in the correct order, take further steps toward integration. This is all well and good. What I don't agree with is people creating the impression, as some are doing, that the central bank can alone prevent what is held to be a critical rise in yields. The best way to reduce interest rates over the long term is by resolutely following through on promises and agreements.
Things are looking considerably worse, however, in the country where the euro crisis began. Next month, the troika of the European Commission, the International Monetary Fund (IMF) and the ECB has to decide whether to approve the next tranche of credit for Greece. Would you say that this country still has a chance?
Let’s see what the troika has to say first.
What happens if the auditors conclude that Greece has neglected the agreed austerity measures? Will we then have to let the country go bankrupt?
That is a decision for the member states providing assistance and Greece itself. It has many facets, not all of them economic. But one important factor will certainly be that there must be no further loss of confidence in the framework of the monetary union, and that the economic conditionality linked to the rescue programmes must retain its credibility.
Why is that?
Because otherwise I do not believe that the leader of another country undergoing a reform programme could persuade his parliament to support austerity measures.
On the ECB Governing Council you cut a “last Mohican” figure as the sole remaining representative of German notions of stability. Did you know what you were letting yourself in for when you took on your current position last year?
I knew what situation awaited me. But I'm convinced of the value of standing up for monetary stability and not losing sight of the long-term success of the euro.
You are putting up with quite a lot at the moment, however. Will you end up resigning, like Bundesbank officials Axel Weber and Jürgen Stark before you?
I can do my job best by staying in office. I want to work to make the euro stay as strong as the deutsche mark was.
Translation: Deutsche Bundesbank