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Interview 17.01.2018

"QE programme needs to run down in 2018"

Interview with Frankfurter Allgemeinen Zeitung

Interview conducted by Holger Steltzner and Philipp Plickert.
Translation: Deutsche Bundesbank

Mr Weidmann, the economy is booming, and yet the European Central Bank (ECB) is sticking to its zero rate policy and pumping billions more euro into the market every month, driving the prices of equities, bonds and houses ever higher. The only thing is, the inflation rate isn't getting off the ground. How does that all fit together?

You’re right to say that monetary policy is highly accommodative and continuing to buoy economic activity. Euro area gross domestic product hasn't risen this fast in a decade. Most countries are clocking up decent rates of expansion, and employment is at record levels. But the mandate of the ECB Governing Council, remember, is to preserve monetary stability, and that depends on consumer price inflation, which remains sluggish in the euro area. That’s why monetary policy is still in expansionary mode. But we certainly don’t pull any punches at Governing Council meetings when it comes to debating the degree of accommodation, the instruments we use, and the role played by developments in financial markets.

But why aren’t price pressures picking up more quickly?

Because a number of different factors are simultaneously at play at the moment. One reason why domestic price pressures are so frail is the lingering after-effect of the financial and economic crisis on a number of euro area countries. Another is that low-cost countries are being more tightly integrated into global production chains which, alongside other factors, is acting to stifle wage growth and inflation. That said, I am confident that we are moving along a path that is consistent with our definition of price stability – that is, towards inflation rates of below, but close to, 2%. The Eurosystem’s staff projections point in a similar direction.

Looking at the German economy, you could say it's already close to overheating. Isn’t it absurd, in this situation, to have policy rates at zero?

Weidmann: I wouldn’t use the term overheating – even in Germany, with its booming economy. But in any case, monetary policymaking in the euro area needs to be geared not to individual countries but to the average of the currency union. And of course it makes it easier to conduct monetary policy in the euro area if activity in the individual economies moves broadly in the same direction. You could say that at the end of the day, the ECB tailors a monetary policy garment in a single size, and it’s up to the governments to embrace sound economic and fiscal policies to make sure that that piece of clothing is neither too big for one country nor too small for another.

True, but in Germany there’s a sense that the ECB is making monetary policy for countries in the south. You pushed for the ECB Governing Council to set a clear end-date for the asset purchase programme (QE) and let it run down. ECB President Mario Draghi has got a majority of the Governing Council behind him. What does it mean for the Bundesbank, and for you, to always be outvoted on major issues?

I fight my corner at Governing Council sessions and advocate positions which, to my mind, are consistent with our analysis and my own beliefs. But if a majority of Governing Council members decide otherwise, that does not necessarily mean that the case I make goes unheard. Just take the ongoing government bond purchase programme. As you well know, I am not a fan of government bond purchases, especially since they can be used to influence the risk premiums of individual countries in a highly targeted manner or to redistribute sovereign default risk via our balance sheet. In the current programme, these effects, at least, have been contained, following intense debate on the ECB Governing Council.

The QE programme has now seen the purchase of €2.3 trillion in assets, chiefly sovereign paper, and a further €30 billion is being added every month, at least until September 2018. Is the purchase programme finally going to wind down this year?

Weidmann: I took the view, and still do, that government bond purchases should generally only be used as a last resort, particularly when there is a risk of deflation. They do, after all, have adverse side-effects that shouldn’t go unnoticed. For example, they have now made central banks the euro area countries’ biggest creditors. This is increasingly blurring the boundaries between monetary and fiscal policy and might make it difficult to exit the non-standard measures. That’s another reason why I recently said we need to set a clear end-date for the purchases. Most Governing Council members are slightly more cautious on this score, and the ECB Governing Council hasn't set an end-date so far. But if activity remains as upbeat as it is at present, it would be logical not to make any more substantial net purchases beyond the currently agreed timeframe.

So the purchase programme is going to expire this year – is that what you're saying?

I think that would be appropriate from today's perspective. And the capital markets have priced in an end-date this year as well. However, I never forecast decisions by the ECB Governing Council.

Mario Draghi says that wage growth in the euro area is a decisive factor in pushing inflation back to 2%. It is understandable that wages in countries in the south, where unemployment is still quite high, are only rising slowly. But the pace of wage growth is muted in Germany as well, even though joblessness here is so low and businesses are frantically searching for skilled workers. In an interview with this newspaper two years ago, you said that wage growth of roughly 3% was appropriate. Why are we still below that rate?

The Bundesbank did not articulate any recommendations or wishes about how strongly wages should rise in that interview, nor will it do so in future. But we do, of course, need to make assumptions about wage developments in our forecasts, and we do say what rate of wage growth is consistent with price stability. But returning to current wage growth, I can tell you that it is weaker than the economic situation alone would lead one to expect, but that isn't the only factor at play here. In Germany, migration flows from other EU countries also play a role, seeing as they have boosted the supply of labour and dampened wage inflation. Another factor is the increased importance which the trade unions engaged in wage negotiations attach to non-wage components, such as working-time arrangements, upskilling or old-age provision, even if that means accepting a slightly lower negotiated rate of wage growth. But even those components are normally a cost factor for businesses which will feed into prices sooner or later, sparking stronger price pressures.

Germany's labour market is already looking very tense. The demographic gap has left a dearth of up-and coming young employees. Businesses are leaving many unfilled positions vacant. Shouldn’t wages be growing at a far quicker pace?

Our forecast did indeed assume that the persistently strong economic activity will unleash stronger wage growth – a rate of just over 3% for next year, for example. As I said, that will probably play a crucial role in boosting inflation growth.

One issue bothering economists is the output paradox. Why is it that, for all the technological progress and the way the internet, smartphones and computers, and networked robots have transformed our economy, the growth in productivity is relatively poor?

You can’t lump all countries together, and we’re undoubtedly facing some statistical challenges in this regard, too. But worldwide, a trend decline in productivity growth has been ongoing since back in the 1970s, one that was only briefly interrupted around the turn of the century in the United States when the “New Economy” craze erupted. Since then, productivity growth has been back on the decline there, too. In Germany, an ageing population – that is, demographic trends – might be a factor, as presumably might migration to the labour market if the additional workers are not as productive as their domestic counterparts initially because of language difficulties or a lack of familiarity with how things are done in this country. In other countries which, like China, say, have already undergone a brisk catching-up process lasting several years, it is only natural for the pace of productivity growth to dwindle at some point or other. In any event, it's difficult to gauge how far exactly new technologies act to boost productivity. Judging by my own personal habits, the amount of time we spend looking at our smartphones, for example, suggests that new technologies can also distract us from getting our work done. But on a more serious note, a new technology can only really boost productivity once it has gained a foothold of a sort in the economy. And that takes time.

Perhaps there are some factors that are difficult to measure in the GDP statistics, like services provided for free online.

Measurement problems might have a bearing because the new technologies are trickier to evaluate. But in our view, measurement problems aren’t the main reason behind the trend decline in productivity growth.

Let’s return to political issues. Are you concerned by European politics? A few weeks ago, you wrote an op-ed for this newspaper in which you voiced criticisms about the European Commission’s reform proposals. French President Emmanuel Macron is pushing for a euro area budget. Will the monetary union evolve into a transfer union?

Some tasks are better addressed at the European level because they have a strong impact across Europe. What I mean by that is jointly securing our external borders, say, and transnational energy and communication networks. But I would begin by defining those tasks, not by making a wholesale call for more money for Europe. The Commission’s latest proposals haven’t convinced me. The upshot is that the fiscal rules won’t be strengthened, while at the same time more and more elements of joint liability are supposed to be introduced in the euro area. This won’t make monetary union more future-proof, because action and liability will fall even further out of step. Anyway, we should first wait and see how German policymakers act after the government has been formed.

What do you make of the proposal to create a “stabilisation facility”, ie a new fund to grant assistance loans to countries in crisis with no conditions attached.

To me, this proposal seems a little like a solution searching for a problem – at least, if you take the existing rules and arrangements of monetary union seriously. After all, a member state with sound public finances can take effective measures against downturns or crises using fiscal mechanisms, without breaching the fiscal rules or having to resort to outside assistance. But if a crisis does threaten to financially overburden a member state, we have the ESM. The ESM has a tiered set of tools and grants assistance contingent on conditions which are designed to tackle the problems at their roots. And rightly so, too – after all, considerable risk is taken on. That already seems sufficient to me, without a stabilisation facility. As it happens, the Academic Advisory Board at the Federal Ministry for Economic Affairs recently pointed out that an additional funding pot of this kind can also harbour risks. To make a definitive assessment, we need to know the exact set-up. Will a borrowing facility also be created at the European level, for example?

Another push by the President of the European Commission, Jean-Claude Juncker, was for all EU states to introduce the euro as soon as possible. Bulgaria wants to join monetary union. Is it ready?

There is nothing to be said against the basic tenet of the euro as the EU currency; it is ultimately envisaged as such in the European treaties. But one of the clearest lessons of the crisis is that countries participating in monetary union must also have the capacity to cope well with relinquishing their own monetary policy – permanently. That’s why the convergence criteria are so important for candidate countries. They have to be met for certain, without us having to turn a blind eye to any shortcomings. At the end of the day, over-hasty accession by hook or by crook does nothing to help either the country in question or the monetary union and the EU.

Why do the TARGET balances – the imbalances in the central banks’ payment system – keep growing? Germany’s TARGET balance has risen to more than €900 billion.

Unlike some years ago, the current development of TARGET balances is no indication of a crisis and of an associated capital flight to Germany as a safe haven. Instead, it is mainly the result of the asset purchase programme and the way in which the non-euro area banks from which the euro area central banks purchase bonds settle these purchases. In any case, over the past few months the rising German balance has chiefly been offset by growing ECB liabilities, while the TARGET balances of the countries hit especially hard by the crisis have remained broadly stable.

The discussion about the risks stemming from the German TARGET balances, in particular, could do with a dose of commonsense. It is underpinned by scenarios that I find very unrealistic. What is more, even in the event of non-fulfilment of a country’s TARGET liabilities, the risks to the Bundesbank wouldn’t hinge on the level of our TARGET claim, but would affect all countries in line with their capital shares in the ECB.

During the crisis, the central banks expanded their balance sheets enormously and became giant portfolio managers. The Swiss National Bank recently made a 54 billion franc gain on its huge portfolio, which includes shares, after major losses earlier. The Fed and the ECB have spent trillions on bonds, while the Japanese central bank is a major shareholder in a lot of companies. The general public are questioning what exactly the central banks are up to.

The Swiss National Bank’s result is primarily down to valuation gains caused by exchange rates and is thus a special case. But it is true that asset purchases have expanded the balance sheets of many central banks to an extreme degree. They have taken unconventional measures to further loosen monetary policy, despite approaching the zero lower bound on interest rates. Amongst other things, this balance sheet increase has resulted in higher interest rate risk, for the Bundesbank as well. We have built up more provisions against this risk. Some of the assets we’ve purchased have a maturity of up to 30 years. Given a hike in key interest rates, there will be an initial increase in our interest expenditure, on bank deposits, for example, while the income from the bond holdings will remain unchanged for longer, thus placing a strain on the central bank result. As I see it, though, the main problems with the balance sheet expansion are the potential politicisation of central banks and the convergence with fiscal policy. This may jeopardise the independence of monetary policy.

You mentioned a key interest rate hike. Most analysts expect the euro area to see a hike in mid-2019 at the earliest.

Roughly speaking, this expectation seems to me consistent with the current forward guidance issued by the Governing Council of the ECB, which says that key interest rates will only be raised well after the end of the net purchases.

Mario Draghi’s eight-year term as President of the ECB ends in October 2019. He was preceded by a Dutch and a French president. Is it about time for a German to take up the baton, Mr Weidmann?

I wouldn’t peg the discussion to nationalities. The important thing is that the ECB President delivers expertise and a focus on stability. Those should be the deciding criteria. There should be no set nationality and none that are excluded.

What is behind the Bitcoin hype? Simply a rush of speculation or also mistrust in state central banks?

Weidmann: I don’t believe it’s the latter. I don’t consider cryptocurrencies like Bitcoin to be regular means of payment. Bitcoin transactions take quite a while; how do you expect to pay at the supermarket using Bitcoin? It also has no stable value – the Bitcoin price is extremely volatile, which is another point against it as a usable means of payment. It’s therefore more likely to be speculation. Which is not to say that the underlying technology is not of interest. The Bundesbank is also testing it in a model project for securities trading.

Are you in favour of tighter regulation?

Weidmann: Regulation should always be well justified, as it involves not insignificant intervention. One objective could be consumer protection, for example. But do we really have to protect consumers from themselves here? After all, there are many ways to make high-risk investments and possibly lose the money. In 17th century Holland it was tulip bulbs, now it’s cryptocurrencies. What is more important, I think, is to address its role in criminality, particularly extortion, money laundering and terrorist financing. For us central bankers, there is naturally also the question of when Bitcoin and others might begin to jeopardise financial stability, such as when banks provide more loans or liquidity. But precisely because of the hype surrounding cryptocurrencies, I believe it is all the more important for regulators to keep a cool head and carefully examine the need for any interventions.

© Frankfurter Allgemeine Zeitung GmbH, Frankfurt. All rights reserved.

Additional information

In conversation

Dr Jens Weidmann

Interview with Jens Weidmann,
President of the Deutsche Bundesbank

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