"I'm under fire"
Interview with Jens Weidmann, President of the Deutsche Bundesbank with the newspaper Frankfurter Allgemeine Sonntagszeitung, published on 2012-12-30
By Rainer Hank and Christian Siedenbiedel.
Translation: Deutsche Bundesbank
Mr Weidmann, knowing what we do now, if we had to decide today on whether or not to introduce the euro – would you be in favour of it?
Back in 1963, Karl Blessing, one of my predecessors, pointed out that monetary union should be embedded in a political union. When monetary union was introduced at the beginning of the 1990s, the Bundesbank cautioned that, at the very least, a set of clear rules to be observed by all members was necessary.
So you would advise against it?
This is no longer an issue. Now it is a question of improving the framework of rules and the will to comply with agreements.
The crisis has been going on for nearly five years now. Crisis fatigue is beginning to spread.
That is precisely what can become a threat. Namely, when policymakers want no part of the crisis any longer and expect the central bank to come and put out the fire.
Have we at least seen the worst of the crisis?
The crisis seems to have calmed down somewhat. Reforms are making progress. However, the root causes are far from being entirely eradicated.
From the outset, you were consistently opposed to ECB purchases of bonds from crisis countries. Since the announcement by ECB president Mario Draghi in the summer to buy, if necessary, an unlimited quantity of bonds, the bond and equity markets have been humming along nicely. Are you now a convert?
The fact that, as you say, the markets are humming along quite nicely at the moment cannot be the sole determinant. What the ECB ultimately announced is that it is quite willing, if need be, to redistribute solvency risks between euro-area countries without limit. However, a clean dividing line between monetary and fiscal policy is important. In addition, the announcement is a sort of insurance policy backed by the central bank – but the insurance is not making the system any more stable. I fear that eagerness to reform will flag if monetary policymakers come to the rescue time and again.
What do you believe are the causes of the crisis?
The core of the crisis is located in the periphery countries: burgeoning household debt, excessive government debt and insufficient competitiveness, which creates doubts that those countries will be able to manage their debt burden on their own.
Your opponents at the ECB say that the intensification of the crisis is the fault of speculators betting that euro-area countries will default.
I have no idea who made that assertion. Speculators are not the problem. Investors in sovereign bonds are typically risk-averse, conservative investors such as insurers or pension funds. Their concerns are justified by problems which actually exist.
But the danger of a large eurozone country such as Spain becoming insolvent has been averted for the time being, hasn’t it?
I am convinced that Spain will service its debt and will be able to reform its economy. However, at the heart of the Maastricht Treaty is that euro-area countries are responsible for their own fiscal policy and are subject to market discipline. If we generally rule out insolvency, that will undermine the incentive for countries to keep their fiscal house in order.
Mario Draghi is able to calm the markets by his words alone. Is he a magician in the mould of former US Fed chairman Alan Greenspan?
I doubt whether Mario Draghi would be thrilled to hear this comparison. He also constantly emphasises that reforms in the countries are the decisive factor and that monetary policy is not a panacea.
Draghi says bond purchases are covered by the ECB’s mandate. You are sceptical. How can the man on the street tell whom to believe?
The debate about bond purchases obscures the fact that I agree with Mario Draghi on a whole host of issues. However, in this issue, I am afraid of stability policy risks and the hazard of blurring the boundaries between monetary and fiscal policy. The Eurosystem should not extensively communitise sovereign solvency risks, which would be too close to monetary financing of governments.
The concept of "monetary financing of governments" is controversial.
I believe that we, as a central bank, should not enter an area which could possibly be regarded as monetary financing of governments. Once people begin to fear that we are printing money to fund budget deficits, our credibility as a guardian of monetary stability will quickly go out the window.
Couldn’t Germany’s Constitutional Court petition the European Court of Justice to review whether the ECB is still in compliance with its mandate?
I do not wish to speculate about the pending case before the Federal Constitutional Court. I prefer economic arguments. The question of how far monetary policy should go is one which we must pose, first and foremost, to ourselves.
Other central banks, such as the Bank of England, also purchase sovereign bonds.
The comparison is off the mark. These central banks buy high-quality government bonds in order to influence the risk-free interest rate in their countries – which can certainly act as an instrument of monetary policy. However, the ECB is not buying any low-risk “Euroland bonds”: such bonds don’t exist. Instead, it buys the bonds of individual states in a monetary union – and not exactly the top-notch bonds.
Has the credibility of the ECB taken a hit this past year?
Throughout the entire debate, my greatest concern has been about protecting the central bank’s credibility from damage.
Would the euro have suffered any damage if the ECB had done nothing?
I don’t think so: policymakers would have then had to take action. I am well aware that these are difficult decisions for policymakers. But it is, after all, the job of policymakers, and not the central bank, to decide on redistributing solvency risks in Europe. By taking action, the central bank takes pressure off policymakers – a risky move.
Will we end up careening into a paper money crisis?
Weidmann: No. However, paper money is based on confidence. Central banks must therefore not allow any doubts about their stability orientation to emerge.
You warned about the threats to the euro’s stability. However, inflation is nowhere in sight.
I never said that the inflation rate would be the problem this year or next. Rather, the issue is confidence in the ability and the will of the central bank to ensure price stability in the medium and long term.
When will inflation become a problem? In ten years?
In the short term, inflation risks will tend to be on the downside. This has to do with the recession in the peripheral countries. In addition, the oil price is dropping. That can change, however, especially if the economy picks up again and interest rates have to be raised.
Will it then be more difficult for monetary policy, as it is being swept along by fiscal policy, to ensure stability?
Being closely intertwined with fiscal policy makes it more difficult for us to focus on our core responsibilities.
“If you flirt with inflation, you’ll end up marrying her”, so to speak?
Otmar Emminger, one of my predecessors, said that, and rightly so. If we now start debating whether or not to allow a little more inflation, we’re playing with fire, in my opinion. Inflation can already rise as soon as inflation expectations increase, even if demand does not go up per se. And babbling about higher inflation targets will precisely stoke such fears.
Interest rates on safe investments are already less than the rate of inflation. That is a creeping destruction of wealth, known as financial repression.
I would not refer to the current negative real interest rates as financial repression just yet. Only when the state begins to influence savers’ investment decisions and engages in coercion would I see such a situation as existing. However, negative real interest rates are a consequence of expansionary monetary policy in the crisis which is felt immediately by savers.
Once we have overcome the crisis, will we go back to positive real interest rates?
That is my assumption. Negative real interest rates are not the norm.
Policymakers’ next planned move is the communitisation of European banks’ liability. They call it a banking union. What do you think of that?
That is not my understanding of a banking union. The idea is to break the vicious cycle of reeling states and struggling banks weakening one another. Stricter joint supervision, a resolution mechanism for banks and improved regulation are necessary to ensure that banks can be prevented from encountering distress wherever possible and that, if this cannot be prevented, at least public budgets are not affected. This includes making owners and creditors, and not the taxpayer, primarily liable in the event of a problem. In addition, unsound national economic and fiscal policy developments should not simply be fobbed off on other countries’ taxpayers via a banking union. That would be introducing the communitisation of liability through the back door.
What is it then?
We have to ensure, for instance, that the creditworthiness of sovereigns is not passed through to banks, thus threatening financial stability, as was the case previously. This is why I am suggesting imposing an upper limit on banks’ holdings of government bonds – and that they back these government bonds, like other types of investment, with capital. Policymakers have been pretty quiet on this topic, unfortunately.
What should we expect next year with regard to the euro crisis?
I expect a gradual recovery – if reforms are actually implemented in the various countries. One of the risks, therefore, is of individual countries splitting from this consensus. This is not an abstract warning.
How high is the risk that Italy, possibly under the leadership of Silvio Berlusconi, will discontinue fiscal consolidation?
Berlusconi’s remarks illustrate that the path Europe must take is being called into question time and again in the political debate. Decisions ultimately rest with national policymakers. However, I am confident that Italy will continue its reform path.
Your understanding of your role is visibly different from that of your predecessor. The economist Albert Hirschman writes that the two possible responses to problems are either “exit” or “voice”. Your predecessor chose “exit”; you are protesting, but have chosen to stay on board. Why?
I have great respect for Axel Weber’s decision. Unlike him, however, I knew what I was getting into when I took on this post. Moreover: if all Bundesbank presidents chose the “exit” strategy, what good would that do? They would keep resigning until a “yes man” comes along.
Your opposition to the alleged rescue of the euro has made you the face of an extra-parliamentary opposition now that there is no opposition within parliament to the rescue of the euro.
My primary concern is to maintain the euro as a stable currency and not to lend a face to political views. There are good economic reasons for my official views as President of the Bundesbank.
Many people on the street are saying that they no longer have any confidence in policymakers – but that they do believe in the President of the Bundesbank. Are you their hero?
If people have confidence in the Bundesbank, that is good. However, I am just doing my job and not striving to be a hero.
Do you still have the backing of the Chancellor?
The Chancellor, too, is always emphasising the stability foundation of monetary union. We central bankers, however, need our own compass. We are independent in order to stay the course even when, on a particular point, policymakers do not support us.
Did you threaten to resign over the past year?
That is not true and would not be my style anyway. I see my place at the top of the Bundesbank.
Where did you have more power: in your earlier job as adviser to the Chancellor or now as President of the Bundesbank?
I have more responsibility in my current job than before, but then again, I’m coming under much more fire for my views.
Do you have trouble sleeping in times of crisis like these?
Of course, I am driven by the issues of what will happen to Europe next and what role central banks will play in the future. Still, one has to be able to let go. Should I not manage that at home, my children remind me that there’s more to life than the euro crisis.
Please tell us and our readers what is in store for us next year.
I hope you are not expecting me to predict the election results; in addition, economic forecasts are now even more difficult than before. But optimism is called for, especially at the beginning of a new year. I am therefore confident that, after a brief “lean period”, we will move back onto the path of recovery – in Germany and the rest of the world. Most importantly, the German labour market is likely to remain stable. All that, however, is predicated on the assumption that the reforms in the crisis countries make progress.
The Maastricht upper limit for government debt is defined as 60 per cent. The euro-area average now is 90 per cent. Will Maastricht ever again be complied with?
Unfortunately, that would be trying to predict the very distant future.
Back to Maastricht or setting forth towards more Europe?
That question has to be answered by policymakers. I have the feeling, however, that nobody is ready at present to take the great leap towards a political union. To me, that means that we have to remain grounded in the current legal framework defined by the Maastricht Treaty and that, within this framework, we have to restore the balance between liability and control.