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Interview 19.03.2018

Weidmann sceptical of stability mechanism reform proposals

Interview with Neuen Osnabrücker Zeitung

Interview conducted by Burkhard Ewert and Ralf Geisenhanslüke.
Translation: Deutsche Bundesbank

Mr Weidmann, Germany now has a new government – what do you see as its most pressing tasks?

The same ones the last government had on its plate. It’s still the case that the ageing population and a feeble long-term growth trend pose huge challenges for us here in Germany. And then, of course, there’s how we deal with globalisation and digitalisation, and stake out the road ahead for the euro area. All this is tied up with the question of shared prosperity. The knottier global backdrop isn’t making these tasks any easier.

You’ve already made the acquaintance of the new Finance Minister, of course.

That’s right, I had the pleasure of getting to know Olaf Scholz in Berlin about ten years ago, back when he was Labour Minister and I was the Economic Policy Adviser at the Chancellery.

What’s your take on the SPD taking charge of the Ministry of Finance?

There’s nothing new about that. Remember, an SPD politician held the post of Finance Minister in the first grand coalition under Angela Merkel’s leadership. The governing parties during the last legislative period are continuing their coalition, albeit with a changed line-up and different priorities in some areas. In fiscal policy matters, the coalition agreement is largely focused on continuity.

Can the same be said about how Germany will operate in Brussels? Might we not see fresh nuance on the fiscal policy or debt management fronts? A shift away from the austerity diktat, perhaps in the interests of Italy?

I don’t buy all this talk about an austerity diktat – and there aren’t any figures to back it up either. Fiscal policy in the euro area has been more or less neutral since 2013. And let me add that fiscal prudence isn’t just some German fad. It was enshrined in the European treaties and besides, it is in the interests of the individual countries to have enough financial leeway to carry them through in good times and in bad. That’s why I see no reason why Olaf Scholz should not be pressing the case for sound public finances in Europe. Increased risk sharing, which is repeatedly being called for, is one major area in which healthy government finances would be a key prerequisite, albeit an insufficient one.

Germany’s target is to achieve a balanced budget. But what about Greece? Would debt forgiveness be an option once the third assistance package expires?

It’s safe to say that forgiving debt isn’t the key to ironing out the fundamental problems dogging Greece. It’s up to Greece itself to do what needs to be done to create a sound footing for a competitive economy and robust public finances over the medium and long term. At the end of the day, there needs to be a reliable prospect that the country will be able to stand on its own two feet. Failing that, even if debt is forgiven, we’ll be back where we started within the space of a few years. And we shouldn’t forget that the exceptionally favourable terms of the assistance loans have already gone a very long way indeed towards easing Greece’s debt burden.

How might a European Monetary Fund (EMF) come into this?

EMF is a term that means very different things to different people. But if a reform of the European Stability Mechanism (ESM), say, helped promote sounder budgetary positions, it would get my backing. The Bundesbank has tabled proposals outlining how the ESM could improve fiscal surveillance and how it can be strengthened as a crisis resolution instrument. Yet there are many who are hoping for a mechanism which provides funds with no strings attached when the economy runs into choppier waters. If you ask me, that’s neither necessary nor sensible, because flexibility is already built into the existing rules of the Stability and Growth Pact (SGP) and enables member states to respond to cyclical fluctuations. And there is nothing to prevent fiscally sound countries from temporarily stepping up their borrowing within the SGP framework. In any case, the proposals on the table haven’t won me over, and I’m particularly sceptical about creating new scope for borrowing or transfer systems.

Are European governments too soft in matters of fiscal policy?

Let’s just say that the tailwinds provided by the very upbeat economy and the exceptionally low interest rates are not being harnessed for consolidation purposes. The highly indebted countries, especially, are only reducing their debt ratios at a very sluggish pace.

The EU is looking to tap revenue sources of its own, such as by levying a tax. What’s your take on this, and who should have the last say in how that revenue is shared – the Parliament, the Council or the Commission?

I think this debate is putting the cart before the horse. Tapping new sources of revenue and raising more funding for the EU isn’t an end in itself. We first need to work out where it makes more sense for tasks to be performed at the European level – border control, for instance, or transnational infrastructure projects – and where it would be better to organise the European Union’s activities on a decentralised basis. Perhaps work can also be re-delegated or returned to the member states. Only when the desired outcome, and an efficient path towards achieving it, have been mapped out can talk turn to the question of funding. Sequencing the steps in that order would, I feel, also boost public backing for the European project.

When do you think it will be clear when the Eurosystem’s asset purchases, which are scheduled to run until September, will come to an end?

The ECB Governing Council has yet to decide when the purchases will be terminated, and how. Speaking personally, I think the strong economic situation and also the projected price dynamics will allow us to set an early end-date. Market participants, at least, are expecting the purchase programme to be concluded before the year is out.

Interest rate policy has driven real estate prices higher. How do you see the path ahead?

We don’t forecast how prices will evolve in individual markets. Saying that, it is clear that the highly expansionary monetary policy combined with the exceptionally upbeat economy has sent asset prices higher, including for real estate. In Germany, property prices have raced higher, above all in urban areas. Our model calculations indicate that real estate in big cities is overvalued by as much as 35 %. But what matters to us as a central bank, and for our banking supervision and financial stability tasks, is whether this will evolve into a risk to the financial system, perhaps because borrowers take on too much debt or banks soften their lending standards. We see no sign of either development at present.

Looking at the market from a tenant’s vantage point, what do you think about the cap on rent increases?

The main reason why rental prices in new contracts are increasing is because housing demand in urban centres is far outstripping supply. The key to providing lasting relief in the real estate market, then, is to build more – that is, create additional housing. Construction activity already picked up noticeably last year, and if it is still constrained in any way, policymakers can and should take action.

The economy is booming, but inflation is lagging behind expectations. Wage growth is also proving to be sluggish. Why is that?

That’s not the case in Germany anymore. The recent pay deals negotiated by the IG Metall trade union are certainly meatier. This makes them consistent with a cyclically driven upturn in wage growth of the kind we were expecting to see. Price pressures also look set to increase in the next few years.

Yes, but the kind of pay deals that metalworkers negotiated in the past aren’t the same as what nursing assistants, say, or employees in other professions tended to get. Do you think things will be different this time around?

Wage growth will always vary from one sector to the next, of course, because of sectoral differences in the economic situation and labour market conditions, for example. That said, with capacity utilisation and employment levels high, we are currently expecting wage settlements to pick up overall.

You’re the clear favourite to become the ECB’s next president. If you get the job, what would you do differently?

Mario Draghi still has something like a year and a half of his term of office left to serve. Speculating about his successor at this stage would do the office a disservice and I’d rather stay out of any such speculation.

Succession is also the name of the game on the Bundesbank’s Executive Board, with both Carl-Ludwig Thiele and Andreas Dombret leaving the institution. Do you think expertise is always given the attention it deserves in the search for successors, or would you say that political matters have more of a bearing?

It goes without saying that Executive Board members need to possess the relevant professional qualifications to look after the Bundesbank’s various tasks. And in my view, it’s also important for us to assemble a good blend of skills and experience on our Executive Board. Having a political background can certainly be of merit – the Bundesbank does, after all, operate in a political context as well. Similarly, administrative abilities are valuable because the Bundesbank is a large institution that needs to be run professionally. And we need Board members with the ability to take charge of banking supervision, say, or shape monetary policy. It’s the blend that counts.

Talking about having a good blend, wouldn’t it be preferable to have an additional female Executive Board member?

You’re right there – our Executive Board is another area where women are underrepresented. I would like to see a greater number of qualified women on our Executive Board in the future.

Women make up 60 % of employees in the financial sector, but hold just 5 % of the top jobs. Should women stick to being a pretty face at the bank counter and forget about wanting to move upstairs?

I can only speak for the Bundesbank, and that’s not a commercial bank but a central bank, a public institution, where the share of female employees is currently 44 % and rising all the time. Equality is something I feel strongly about, not least in terms of managerial positions, and we’re on the right track to boost the proportion of women with leadership responsibility. Our future depends on our ability to unlock our employees’ potential, whether they are female or male. And given that the Bundesbank is also feeling the effects of an ageing society, we need to be an attractive employer, not least for women.

18 March was Equal Pay Day, the symbolic day dedicated to raising awareness of the gender pay gap. Do women earn less than men at the Bundesbank, too?

Our wages are based on the public sector pay scale, and that means same work, same pay. It’s all about boosting the number of women holding managerial posts. That’s one reason why we drew up an equal opportunities action plan, which made it easier to work part-time, say, and saw the launch of a mentoring programme. And the day nursery here on the Bank’s grounds also helps our employees improve their work-life balance. What counts is that we embrace and promote equality on a daily basis here at the Bundesbank.

But you have failed to achieve the targets you set yourself, and a comparison with the supreme Federal authorities also shows that women tend to be promoted less frequently at the Bundesbank, relative to the proportion of female staff employed there. Isn't your action plan having the desired effect?

It is, although I’m not denying that we still have some way to go. During my term of office, the share of women in managerial posts has risen by five percentage points, from roughly one-fifth to one-quarter. That has brought us very close to our milestones, and we are looking to push this figure notably higher in the years ahead. I see eye to eye with our equal opportunities officer on this score that it’s mainly a question of taking concrete measures to move us closer towards the target. A multiyear analysis needs to show that clear progress has been made.

© Neue Osnabrücker Zeitung, Osnabrück. All rights reserved.

Additional information

In conversation

Dr Jens Weidmann

Interview with Jens Weidmann,
President of the Deutsche Bundesbank

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