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Interview 2013-11-27

Let’s not start discussing the next round of measures yet

Interview with Jens Weidmann published in Die Zeit on 21 November 2013: "It's good if we contend with each other over the right decision"

Interview conducted by Mark Schieritz and Arne Storn.
Translation: Deutsche Bundesbank

Mr Weidmann, how important is a stable currency to you?

The most important task I have as President of the Bundesbank is to ensure price stability. That's what I stand for – and it’s what this institution has stood for over fifty years now. Why do you ask? 

Because prices aren't stable. The rate of inflation is currently well below the target, which has led the ECB to lower its key interest rates. You voted against that move – why?

The latest inflation figures put the rate at just under one percent in the euro area, so it’s hardly fair to say that our currency isn’t stable at the moment. But it’s true that the ECB Governing Council aims at inflation rates below, but close to, the two percent mark. The Governing Council’s meetings are actually confidential, by the way.

But we’re aware of its members’ views.

I can say this much: when we convened in early November we were facing a surprisingly sharp decline in inflation in the euro area. Yet this fall was partly due to temporary factors, such as lower energy prices. We have to base our policy on future price developments, as they are the only ones we can influence.

The forecasts suggest that inflation will remain below this target over the next few months too.

The inflation outlook certainly looks very moderate, and that justifies an expansionary monetary policy stance. The main priority at our meeting in November was to decide whether to wait for the new ECB projections in December to see if they indicated that we should lower interest rates.

If it was just a question of getting the timing right, why all the commotion?

Perhaps you should ask your colleagues in the media – it was their reporting which stirred up all the commotion.

But the Governing Council did give the impression of being divided.

It’s good if the members of the Governing Council contend with each other over the right decision; that produces a better outcome in the end. There are also intense debates at the Fed and the Bank of England, yet that doesn’t seem to attract nearly as much media attention.

Maybe that’s because differences of opinion on the Governing Council have been aired in public in the past – by yourself, among others. The ECB’s controversial bond purchases are a case in point.

Interest rate policy involves taking decisions that lie at the heart of monetary policymaking. But the very fundamental question of whether we should stray into the realm of fiscal policy by making government bond purchases, and redistribute risks among the taxpayers of the various euro-area countries, is quite another matter.

The next assistance measures are already being discussed. Will you be in favour this time?

The Governing Council has only just loosened its monetary policy stance. I don’t think it makes sense to start discussing the next round of measures just yet.

What if you’re outvoted again?

None of the Council’s members has a veto. But it is possible to achieve a great deal without getting one’s way on every single point.

The interest rates have now almost hit zero, they can’t go much lower than that. What more can the central bank do?

Technically, there is certainly more we could do. But we have to ask ourselves what actually makes sense. The debate about what further measures we might take distracts attention from the real root causes of the crisis. The euro area isn’t having problems because the interest rates aren’t low enough, but because some countries lack competitiveness, have high government debt and troubled banking systems. These problems can only be fixed by politicians, not the central bank.

The politicians are saying, "we’re already making reforms, why don’t you help us?"

We have lowered interest rates and are providing banks with an unlimited supply of liquidity. But there is no quick fix for this crisis – and certainly not through simply "printing" new money. It will take years to eliminate the real root causes of the crisis.

But that's partly because the policy rate may still be too high for the crisis countries in southern Europe.

And it’s probably too low for Germany. Ten years ago it was the other way around: many people felt that the policy rate was too high for Germany. We’re part of a monetary union, which means that the ECB has to base its policy on the needs of the euro area as a whole. It’s up to national politicians to smooth out any differences.

And now German savers have to foot the bill for Europe’s ills.

Weren’t you just saying we should lower interest rates even further? That aside: anyone wanting to deposit their money safely in Europe at the moment is feeling the effects of the low interest rates. That’s just as true for Italians as it is for Germans.

So why aren’t you, as a central banker, doing anything about it?

Savers need to be able to count on us to keep the value of our currency stable. Above all, they need to be sure that we will raise interest rates in good time if inflation risks increase again. But it’s not our job to guarantee a certain real return – by which I mean the return after adjusting for inflation.

Cold comfort.

I do understand these concerns. But I believe it’s important to remember that we, as citizens, are not just savers. We’re also employees and taxpayers, perhaps we’re looking to buy property. And there we benefit from the low interest rates, because they may be keeping our job safe, making mortgages cheaper and easing the strain on public coffers. That’s often forgotten in the current debate.

Savers’ woes do seem to be the Germans’ favourite subject.  The Bundesbank is proud of its independence from the political world. How independent are you of public opinion?

The Bundesbank’s reputation is not based on us telling the media or those with influence on public opinion what they want to hear. It’s based on us steering a clear, coherent course and keeping the value of the currency stable. That’s the best way for us to serve the citizens of this country.

Mr Weidmann, in its Annual Report the German Council of Economic Experts described the plans of Germany’s new coalition government, which is still taking shape, as "backward-looking". Do you share this view?

There isn’t even a coalition agreement yet. But I can relate to the calls to keep Germany an attractive place to do business. Ultimately, we should judge the coalition on its ability to respond to the challenges that lie ahead.

And what are those challenges?

The emerging economies are growing in importance, and competition in the world economy is getting tougher. At the same time, we’re feeling the effects of our ageing society. Germany should therefore prioritise the tasks of investing in education, future-proofing its social security systems and improving access to the labour market.

Isn’t that more or less the opposite of what the coalition wants?

No, I believe the coalition does want to prepare Germany for the challenges ahead. But to achieve that we shouldn’t go back on reforms which played a vital part in improving our situation when we were still known as the "sick man of Europe".

There are also plans to use budget surpluses in the coming years for investment rather than for paying off the country’s debt.

Public investment in Germany has seen a relatively weak development in recent years, so there is some catching up to do in certain areas. But that should not mean abandoning the aim of budget consolidation.

The coalition does intend to keep lowering the debt ratio – just more slowly.

Given the very high debt ratio and the foreseeable burdens resulting from demographic change, it would be more appropriate to reduce it rapidly. Incidentally, we’ve expected falling debt ratios all too often in the past only for things to turn out differently in the end. We also can’t assume that today’s favourable budget situation will simply continue in the future. That’s why we need to plan in a sufficient safety margin below the debt brake limits.

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