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Interview 19.05.2018

"Business activity is exceptionally brisk"

Complete version of the interview with Funke Mediengruppe and Ouest-France

Interview with Jens Weidmann conducted by Kerstin Münstermann, Jörg Quoos and Sébastian Vannier.
Translation: Deutsche Bundesbank

Mr Weidmann, the ECB's controversial bond purchases have already added €2.4 trillion to its balance sheet. When will this risky programme be brought to an end?

The bond purchases will continue until September at least, as the Governing Council of the ECB decided, but the markets are not expecting the purchases to extend beyond the end of the year. This seems to me quite plausible, as business activity in the euro area is exceptionally brisk, and economic capacity utilisation is now very high. In its last projection, the ECB expected euro area inflation to reach 1.7% in 2020. I consider that to be well within our definition of price stability.

This step would have to be announced soon, then. Are you expecting the ECB Governing Council to make such a decision shortly?

I don't make any predictions about Governing Council decisions, but I think it would be sensible to provide clarity and announce an end date soon.

What will happen after that? Will key interest rates be raised again?

At the moment, monetary policy is still running at full throttle because our balance sheet bond holdings are continuing to increase. And the Governing Council has explained that the key interest rates will only go back up well after the end of the net purchases. This means that monetary policy will remain on an expansionary track for some time; the path back to normality will be a very long one. But this also has two implications: the start of the normalisation process should not be delayed unnecessarily; and monetary policy, for the time being, will not have much room to manoeuvre in response to future slumps and crises.

How do you see the bond purchases from today's perspective?

To me, government bond purchases are and will remain an emergency measure to ward off the threat of deflation. I don't doubt that the purchases are effective – they certainly supported price developments – but I'm concerned about the side effects. The Eurosystem has become the governments' biggest creditor, which blurs the boundary between monetary and fiscal policy.

French President Emmanuel Macron has gone on the offensive with proposals such as a separate euro area budget. What is your take on the French plans?

President Macron has breathed new life into the European policy debate, and that's a good thing. In this instance, I think it's important that actions and liability remain balanced, thus encouraging responsible policymaking in the member states. It would be inconsistent for countries to continue making decisions at the national level, but for the financial consequences of these decisions increasingly to be borne by all. In terms of how to proceed, I believe it would make sense to first agree on shared European tasks which can then also be jointly financed. If we begin by discussing the finances, we'd be putting the cart before the horse.

What can the EU manage better than the individual countries?

President Macron gave the right cues, for example, securing external borders, a shared approach to migration policy, expanding digital networks, and even exchange programmes for school students. Taking steps towards a common tax base also makes sense. But this must not result in competition between the various countries being eliminated. After all, different tax burdens may also stem from the fact that infrastructure or other government services vary from country to country. In principle, we should transfer tasks to European responsibility if – and only if – we can achieve better results at the European rather than the national level.

Do you welcome Macron's approach, then?

Yes, and I think it's very important that we have in Emmanuel Macron a partner who seeks dialogue with Germany and aims to create momentum. Which is not to say that every proposal has to be supported without question.

But European policy involves give and take ...

Which is precisely why we should discuss these proposals carefully. Our shared objective is to strengthen Europe and preserve the monetary union as a union of stability. Retaining national sovereignty means that it is chiefly down to the member states to strengthen Europe, by putting their public finances on a sound footing, for example, and creating efficient economies. But I also see areas in which we should develop European solutions.

Such as?

In principle, given that supervision and resolution are now carried out at the European level, there is something to be said for a European deposit protection scheme in the banking union. But this argument only holds for new risks in bank balance sheets, not for legacy risks. These therefore have to be reduced first, and we must ensure for the future that banks do not make themselves unduly dependent on the prosperity of their home country by maintaining large government bond holdings.

The President of the European Commission, Jean-Claude Juncker, wishes all EU countries to adopt the euro as quickly as possible. What do you think of this plan?

This objective is set out in the European treaties. But the crisis was a reminder of how important sustainable economic convergence is for the smooth functioning of monetary union. The ECB sets a common monetary policy for all members of the euro area. Figuratively speaking, it follows a one-size-fits-all approach. But when one country takes an XXS and the other an XXL, they all end up unsatisfied.

What would be the implications of Romania and Bulgaria quickly adopting the euro?

As I said, the euro should be adopted in Romania and Bulgaria only when permanent convergence has been achieved and the framework conditions are reliable. Their progress on this path is currently being reviewed at regular intervals.

Let's look at Germany's economic outlook. Is the current slowdown simply a minor dip, or might there be a severe downturn?

Special factors such as the flu outbreak and industrial strikes dampened growth slightly in the first quarter. But the underlying pace of economic growth in Germany is intact. Employment will continue to rise, and in fact bottlenecks are increasingly evident, especially in the construction industry. But that doesn't mean that there are no risks.

Which specific risks do you perceive?

The risk of the trade dispute with the United States escalating, for one. This concern is already clouding business sentiment, and an escalation of the conflict could seriously damage economic growth.

And what would constitute an escalation?

If trade restrictions were to keep on intensifying as a result of tariffs and retaliatory measures.

So is it the wrong strategy to respond to threats of punitive tariffs with threats of retaliatory tariffs?

At the end of the day, there are only losers in trade wars. The goal needs to be to dismantle trade barriers rather than putting up new ones. President Trump has bemoaned obstacles to international trade and has also raised points that are worth discussing as far as, say, protecting intellectual property and improving access to the Chinese markets are concerned. But to say that the tariffs are too high and then impose punitive tariffs doesn't get us anywhere. We should instead make use of the dispute settlement system established by the World Trade Organization (WTO), fine-tuning it if need be.

What implications would a wave of punitive and retaliatory tariffs have?

The import tariffs imposed thus far will make US steel and aluminium industries less competitive and raise prices for US consumers. If these tariffs were also imposed on steel and aluminium imports from the EU, it would be extremely irritating, but it wouldn't put the brakes on the economic upswing. It would be a different story if there were an escalating trade war.

Does Germany bear a special responsibility in this discussion?

The EU needs to show a united front on this issue. While, as an export-oriented economy, Germany has a particular interest in preserving free trade, there are also other European countries that export all over the world or profit indirectly from our exports. For example, many of the firms that supply parts to German car manufacturers are located in central and eastern Europe.

Germany once again has an SPD politician in the post of Finance Minister. Has Olaf Scholz set the right priorities as far as the Federal budget is concerned?

I think his commitment to sound fiscal policy is the right move. It's important when discussing this to remember that the economy is currently booming – it doesn't need any additional stimulus to get it jump-started. What we need to do is take advantage of the favourable situation we currently find ourselves in so as to be prepared whenever the situation takes a turn for the worse. At the same time, it is important to strengthen our base and improve the conditions for private investment. Above all, it's a question of priorities in the budget – and no new debt is needed to this end.

What measures are you thinking of, exactly?

One idea is a strategy to tackle demographic change that will significantly curb German economic growth in the medium to long term. We need to increase the number of women in the workforce and ask ourselves whether it wouldn't be sensible to raise the retirement age as life expectancy goes up.

Do you think there's a political will to extend working life?

Why should the issue of extending working life in Germany be off the table when such a diverse range of countries, including Denmark and Italy, have already introduced systems that rightly link the retirement age to life expectancy? If pensions remain at the same level, keeping the retirement age static as life expectancy goes up will do nothing more than place a growing burden on younger generations. We, as a society, can opt to take that path, but we need to be fully aware of the consequences: namely that labour costs will rise as employment and competitiveness fall.

In view of Germany's €60 billion surplus, can you understand why some are calling for tax relief?

This impressive figure covers additional revenue from all levels of government as a total for the period from 2018 to 2022 and compared with the May 2017 tax estimate. There is considerably less fiscal space available to Federal Government for each individual year, and it has been all but exhausted in connection with the coalition deal. Plus, we have to remember that we owe current surpluses to strong economic activity and low interest rates, too. Neither of these will last forever. At the same time, general government will be faced with higher costs in the future, not least in connection with the demographic developments I mentioned earlier. With that in mind, slight fiscal surpluses would be more appropriate. If, after factoring these in, there is still fiscal space available, it could be used.

None other than the President of the Association of German Banks believes that Germany's banks are in crisis, citing too many banks and excessively high costs. What does this mean for Germany as a financial centre?

Scrutinising the situation they find themselves in and their existing business models is an important step. The German banking system has to contend with structural problems and various challenges, such as the low-interest-rate environment, heightened regulatory requirements and new rivals, which include internet giants such as Amazon and Apple.

Are the banks equipped to deal with a potential new crisis?

The banks are now better equipped, as they hold far more capital than they did in the pre-crisis period. More capital means a larger buffer to absorb any losses and lays greater liability at the feet of banks' shareholders. This makes banks more aware of risk in their actions.

Mario Draghi will step down as ECB President on 31 October 2019. What are the arrangements for succession?

I'm not the one who'll be making this decision, so you'll have to ask someone else. In any case, I think it's much too early to discuss this topic.

Would you be prepared to succeed him?

I think that every member of the ECB Governing Council should have the creative drive to also contribute to monetary policy in a different capacity.

What challenges await the new ECB President?

These days, it's not a question of responding to the crisis but of leading monetary policy back into more familiar territory and defining the monetary policy strategy of the future.

Whose viewpoints will a future ECB President need to bear in mind? Those of southern Europe – Greece and Italy, say – or rather those of northern Europe?

The great thing about monetary policy is that policymakers don't have to take such matters into consideration, nor are we allowed to. Our mandate is price stability for the euro area as a whole. It therefore isn't the job of the ECB Governing Council to make policy for individual countries. And I'm not just saying that on a whim – the Eurosystem's mandate is defined as such in the European treaties.

Can we see a real estate bubble starting to form?

According to our latest calculations, housing is overvalued, on average, by up to 30% in the seven largest cities in Germany. Even so, we do not see this posing any threat to the financial system as a whole, in part because banks' credit standards are still far stricter than they were several years ago and mortgage lending is rising at a comparatively moderate rate.

A word of advice to frustrated savers: what can they do with their money?

You can't expect investment tips from the President of the Bundesbank. In any case, it really boils down to your personal situation: a smart investment strategy for a 75-year-old wouldn't be smart for a 20-year-old. But you can't go wrong if you bear these two time-honoured rules in mind: first, higher returns mean higher risk, and second, never put all your eggs in one basket.

© FUNKE MEDIENGRUPPE GmbH & Co. KGaA, Société Ouest-France. All rights reserved.

Among others published in Westdeutsche Allgemeine, Hamburger Abendblatt, Thüringer Allgemeine and Ouest-France.

Additional information

In conversation

Dr Jens Weidmann

Interview with Jens Weidmann,
President of the Deutsche Bundesbank

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