Strong commitment to a stable euro, both now and in the future Guest contribution published in the Börsen-Zeitung
When film director Woody Allen turned 60 years old, he said with his characteristic irony: “
I recently turned 60. Practically a third of my life is over.”
Of course, not even Woody Allen can expect to live to 180. For central banks, however, it’s a different matter entirely. In these coming weeks, the Bundesbank will be celebrating its 60th birthday, making it a dignified but by no means venerable member of the community of central banks. The Oesterreichische Nationalbank celebrated its 200th anniversary last year, and the Bank of England and Sveriges Riksbank have both been in existence for well over 300 years.
In spite of its comparative youth, the Bundesbank has a long history of successes to look back on. The Bundesbank and its forerunner, the Bank deutscher Länder, contributed significantly to the stability of the D‑Mark, which characterised it from the start. The D‑Mark became a symbol of national identity which represented not only stable money, but also economic strength and prosperity. It accompanied Germany on its ascent to the status of an export nation.
There were two prerequisites to the Bundesbank’s success: independence and a monetary policy oriented towards price stability. It is therefore no coincidence that it was specifically Germany and Switzerland, with their independent and stability-oriented central banks, which survived the period of high inflation of the 1970s with comparatively low inflation and unemployment rates.
In the 1980s and 1990s, many countries began to approximate the Bundesbank model, making their central banks more independent and focusing on the goal of price stability. The highlight of these developments was undoubtedly the foundation of the European Central Bank (ECB), which was modelled on the Bundesbank.
This was both a sign of recognition and a turning point for the Bundesbank: recognition, to the extent that the Bundesbank’s framework of a federal structure, independence and a clear mandate, transferred to the ECB, was enshrined in the European treaties, and was therefore even more strongly secured from a legal point of view than had ever been the case in the days of the D-Mark. At the same time, however, entering the monetary union was also a turning point as it fundamentally altered the Bundesbank’s work. Where it had once been solely responsible for the D‑Mark, it now had a shared responsibility for the euro.
This shared responsibility entails making joint monetary policy decisions on the ECB Governing Council, but also continuing to implement monetary policy in Germany at the operational level. Cash supply and the settlement of payments in Germany have also remained among the core tasks of the Bundesbank. In cooperation with the Banca d’Italia and the Banque de France, we are now responsible for the backbone of European payment and securities settlement operations: TARGET2 and TARGET2-Securities. In addition, the Bundesbank, in conjunction with the Federal Financial Supervisory Authority, does not solely monitor the many small and medium-sized banks in Germany, but is also involved in the supervision of the large, systemically important banks in the entire euro area. Since the foundation of Europe’s Single Supervisory Mechanism, the ECB Governing Council has been the highest decision-making body for supervisory issues in the euro area. The Bundesbank’s remit is therefore no longer to simply monitor systemically important banks in Germany, but rather to keep an eye on those in all euro-area countries.
The financial crisis brought about a further change; in the light of one of the key lessons learned from the financial crisis, the focus is no longer solely on the stability of individual financial institutions, but also on the functioning and performance of the financial system as a whole. To this end, the Bundesbank reorganised some of its work processes as early as 2009, and created the Directorate General Financial Stability. On 1 January 2013, the Financial Stability Act came into force in Germany. Since then, it has been our responsibility to identify and warn of risks to financial stability, and prepare recommendations for how such risks can be avoided.
One thing, however, stands undisputed: the most significant changes have taken place in the area of monetary policy. Since the launch of the euro, monetary policy decisions have no longer been made for Germany by the Central Bank Council in Bockenheim, but for the whole of the euro area by the ECB Governing Council in the Ostend district of Frankfurt. The Bundesbank President has a vote on this council, as do the other euro-area central bank presidents and the members of the ECB’s Executive Board.
Of course, the issues discussed by the ECB Governing Council can sometimes be controversial. This is completely natural, to a certain extent; the more challenging the times we face, the more thoroughly our next step must be thought through. The citizens of Europe can therefore expect the guardians of their currency to be participating in intensive discussions about the correct monetary policy course at the current juncture.
One thing has not changed, however, and that is the Bundesbank’s monetary policy stance. Its compass has always pointed, and will continue to point, in the direction of price stability. This stance shapes the views that I express in the ECB Governing Council, as well as those expressed by my Bundesbank colleagues in various ECB committees. And because the founding fathers of monetary union recognised back in the day that the greatest threat to a stability-oriented monetary policy is posed by unsound fiscal policy, we advocate the strict separation of monetary and fiscal policy, in particular. It was not for nothing that Sir Mervyn King, former Governor of the Bank of England, put it like this: “
Central banks are often accused of being obsessed with inflation. This is untrue. If they are obsessed with anything, it is with fiscal policy.”
We are therefore also critical of the Eurosystem’s purchases of government bonds, as they blur the line between monetary and fiscal policy. These purchases have resulted in the Eurosystem becoming the largest creditor of the euro-area countries. By and large, each member state pays the same interest rate on the bulk of its debt—irrespective of the level of its debt—which could weaken some finance ministers’ resolve to ensure sustainable public finances on a lasting basis. Last but not least, there is a danger in the context of public finances that monetary policymakers will come under pressure to keep interest rates low for longer than would be advisable from a price stability perspective.
Unlike under previous asset purchase programmes, however, the Eurosystem central banks are now largely restricting their government bond purchases to securities issued by their home country. In other words, any losses arising from the purchase of other countries’ government bonds will not end up on our balance sheet. This had been repeatedly criticised by the Bundesbank, as mutualising government solvency risk via central banks’ balance sheets is a venture deep into the realm of fiscal policy.
But the Bundesbank’s unequivocal commitment to stability not only makes it necessary for us to ensure, when it comes to monetary policy, that our voice is clearly heard in the chorus of central banks—it also requires us to speak up in the debate surrounding the correct regulatory framework for monetary union. After all, the euro-area crisis brought it home to all of us that the stability of the monetary union cannot be taken for granted. Unfortunately, this vindicates the statement made by my predecessor Hans Tietmeyer 20 years ago: “
The monetary union will not experience only sunny days. There will be rain and storms, too.” But the heavier the rain and more severe the storms, the greater the danger that monetary policymakers will be forced time and again to pick up the pieces, subsequently losing sight of their mandate to ensure price stability.
The extensive crisis measures taken by European policymakers and the Eurosystem may have prevented the crisis from escalating, but they have not made the monetary union permanently stable. First and foremost, they introduced additional elements of mutual liability, which has knocked the relationship between actions and liability off kilter. But I believe that responsible decisions can only be made if decision-makers are also held liable for their consequences. The Bundesbank therefore advocates institutional reform in the euro area that strengthens the liability principle and ensures that the balance between actions and liability is restored.
Consequently, we view with some scepticism reform proposals that boil down to extending mutual liability without transferring the corresponding powers to intervene to the European level, as they could ultimately turn the euro area into a transfer union. This would exacerbate the problems in Europe rather than solve them.
Given the lack of willingness to cede fiscal sovereignty rights to the European level, the only remaining option is to strengthen the member states’ individual fiscal responsibility The Bundesbank has therefore drawn up proposals for reinforcing the binding force of the fiscal rules. We also propose automatically extending the maturity of bonds issued by a euro-area state if that state applies for an ESM programme. That way, the original creditors would still be on the hook to start with rather than being paid off by European taxpayers. This would make the no bail-out clause enshrined in the Maastricht Treaty more credible and ensure that market participants are more risk-aware when making decisions.
During the crisis, it became apparent that troubled banks and ailing states were dragging each other down further and further. It is therefore necessary to sever the close economic ties between sovereigns and banks in the euro area. That is why we successfully advocated for the banking regulatory bodies to consider at the international level how to eliminate the existing preferential regulatory treatment of government bonds in banks’ balance sheets. In future, risk-appropriate levels of capital will need to be held against government loans on banks’ balance sheets, just as they are for loans to any private borrower.
Over the last 60 years, the Bundesbank has not been afraid to ruffle a few feathers if it sees stability risks. This has not damaged its reputation among the general public. Incidentally, Woody Allen also once said: “
My interest is in the future because I’m going to spend the rest of my life there.” These are the Bundesbank’s sentiments, exactly—and it will do its utmost to ensure that the euro remains a stable currency in the future, too.