Does cash have a future? Interview with the Süddeutschen Zeitung

16.12.2019 | Jens Weidmann DE FR IT

Interview with Jens Weidmann conducted by Nico Fried, Cerstin Gammelin und Markus Zydra.
Translation: Deutsche Bundesbank

SZ: Mr Weidmann, were hopes of a change of course under Christine Lagarde premature?

Jens Weidmann: Under Christine Lagarde, the Governing Council of the ECB is sticking to its course for now, particularly since our economic forecasts have not changed in any material way. What is more important is that a review of the monetary policy strategy is on the cards for next year.

The current strategy has led to negative interest rates, which have angered many savers. They are having to pay to bring money to the bank. Do we have to adjust to this new normal?

Amidst all the understandable unease, bear in mind that this situation isn’t that new. At the end of the day, what remains of the nominal interest rate after adjustment for inflation is what counts. And spells of negative real interest rates on short-term savings deposits occurred in the 1970s, 1980s, 1990s and 2000s. They just weren’t as noticeable back then because the nominal interest rates were much higher. What’s different today is that key interest rates are below zero and yields on German Bunds, for example, are negative.

Are people right in thinking that their savings aren’t yielding anything?

Yes, it’s difficult to find safe and profitable ways to invest money. But monetary policy is having a broader impact. It has supported economic activity and helped make employment and wages rise. The social security funds are also benefiting from this. And the statutory state pension often makes up the crucial portion of retirement provisions, especially for people on low and middle incomes. Of course, reasonable people can still disagree about how expansionary monetary policy should be.

But the accusation is that people are being urged to make private pension provisions, while at the same time their savings are dwindling because of the negative interest rates?

There's more to the story than that. It is still prudent to build up retirement provisions, and they do not run for one year, but for 20, 30, 50 years. What’s important is that we don’t stay trapped in this low interest rate period any longer than necessary.

How long will things continue like this?

I’m confident that the inflation rate will pick up enough for interest rates to go back up. But realistically, this will still take some time.

The Federal Government is saving billions on interest each year. Shouldn't it be required to return those savings to the people in some form?

The government is currently spending around €55 billion less in annual interest than it would be using the average interest rate from 2007. Thanks partly to these interest savings, Germany has been able to put its public finances in order and increase spending at the same time. This has also benefited people in Germany.

At the same time, the wealth divide is growing because the ECB is also buying corporate bonds. This is making prosperous business owners richer; the poorer ones, who get no interest, are becoming even poorer. Does the growing inequality concern you?

The non-standard monetary policy measures are throwing up more distributional issues. Real estate and shares, for example, have gained in value due to expansionary monetary policy. But, equally, income inequality is being reduced, because monetary policy is helping to boost employment. We also have to ask what would have happened if the monetary policy stance had not been expansionary.

In that case, the shareholders of enterprises would not be getting richer.

It’s not about making someone rich. Monetary policy is certainly lowering financing costs in the economy overall. And lower lending rates also ease the pressure on indebted households.

Some are calling for the ECB to shower us with helicopter money. Banknotes for everyone, fresh off the press. What do you think of this?

I take a dim view of helicopter money. We lend money to banks or buy securities. We don’t give it away. But that’s exactly what the central bank would be doing with helicopter money.

€2,000 for everyone ...

... or perhaps €3,000 or €4,000? I can just imagine the greediness this would awaken and how the debate would go. Why just a one-off? Will the rich be given the same amount? What about children? We’re talking about transfers, which parliaments and governments have to decide on. The central bank would have to record helicopter money as a loss on the balance sheet, and the finance minister would have no profit for quite some time. At the end of the day, the burden would be on the taxpayers. We can’t pull ourselves out of the mire by our own hair like Baron Munchhausen.

The Bank deutscher Länder gave everyone 20 Mark in 1948; that was helicopter money. It worked at one point, then.

That was not helicopter money, but part of a complex currency reform in a historically unique situation. It’s not applicable to the present day.

But former central bankers are now calling for helicopter money for an emergency.

They didn’t call for it when they were in office, though. You see, when monetary policymakers pursue social policy, their independence is jeopardised.

Ms Lagarde has headed the ECB for just over a month now. There is a photo showing the President meeting with colleagues in a lavish setting. The impression is of the monetary policy elite among themselves. Is that still appropriate in this day and age?

To me, the important thing is that we make prudent monetary policy. Whether we do that in a conference room or a hotel is of no consequence. Ultimately, what matters is the result, not the setting.

You were also in the running for a long while. Are you still disappointed?

No, it was always clear that decisions on European posts are a difficult balancing act. And with a German becoming Commission President, there certainly wasn’t going to be a German ECB President.

Did you need a digestif for the shock?

There was nothing to digest. I’m very happy to head up the Bundesbank.

You could always set your sights on the ECB top job again in another eight years.

That’s a long way off. I’m focusing on my work here.

Mr Weidmann, how did you pay for your last weekend shop?

With my mobile. Ultimately, though, it’s a card payment because my credit card details are stored on my phone.

How much longer will cash be around?

Cash is still the preferred means of payment in Germany. Around three out of four purchases in stores are paid for in cash. The share of cash purchases is decreasing only slowly over time. There are also advantages to using cash, you see: you don’t have to give away your data and you’re less reliant on technology.

When will we see banknotes on our mobiles?

We already have a kind of digital euro. It’s what’s in your account, and you can use it to pay for things using your card. But people are coming up with ideas to make the payment process more intelligent.

More intelligent?

Yes, so that complex transactions can be processed electronically – for example, payments could be triggered automatically once goods have cleared customs on time. Another idea is to create a digital equivalent to cash.

Would people be able to withdraw it in the same way as cash?

That would depend on the setup. In any case, if it were possible to withdraw bank deposits in the form of digital central bank money immediately and without limit, a bank run could occur more swiftly than with cash.

Because you would be able to empty your account with one click from the comfort of your home?

Precisely. So in theory, you would just need to push a button.

And commercial banks’ cupboards would be bare.

That’s why there are discussions about limiting the amount of central bank money that people can hold in digital form. A limit of this kind would be hard to uphold politically, though. One thing is clear: the potential implications of digital central bank money – both the good and the bad – have to be considered carefully first.

Are gender and the climate topics that central banks need to pay attention to?

We don’t operate in a vacuum. Another criticism made of the photo you previously mentioned was that it highlighted a lack of diversity. That criticism is justified. That’s why the ECB and the Bundesbank both want to raise the share of women in managerial positions.

Lagarde wants to tackle climate change – should the ECB become the European climate bank?

I agree with Christine Lagarde that we need to better understand the ramifications of climate change and climate policy for our core tasks. Central banks can’t make climate policy themselves, though. That’s a job for government and parliaments.

A job they are having difficulty doing. Will climate protection help or hinder growth?

First of all, climate change is a threat to growth. Better protecting the climate may well involve some burdens in the short term. Ultimately, though, we can eliminate economic distortions with the right climate policy. Up to now, we have been using natural resources without paying a fair price for them. In this sense, good climate policy will improve the proper functioning of the market economy in the medium and long term.

Would it make sense to stimulate the domestic economy now?

There’s no reason why fiscal space available in the short term shouldn’t be used to strengthen the underlying conditions for growth by means of investment or to leave more money in taxpayers’ pockets. A simple way of doing this would have been to bring forward the abolition of the solidary surcharge. We don’t need a stimulus package.

The Greens are calling for the debt brake in Germany’s Basic Law to be expanded to include an investment commitment. Is this smart?

There are various arguments in favour of a golden rule – that is to say, taking account of investment in budget rules. But it would all hinge crucially on its implementation. A key problem is properly defining the scope of investment. For example, only a true increase in government assets should be financed by borrowing more.

Should general government borrow more at this point in order to invest on a large scale?

Often, it isn’t money but rather a lack of construction or planning capacity that constitutes the bottleneck. What’s more, the goal shouldn’t be to have the largest possible expenditure budget but rather to fund sensible projects. The debt brake, which has a proven track record, provides the scope to do this.

What would be sensible?

It’s all about good transport networks, but also an efficient digital infrastructure and green energy. Both government and private investment are needed in these areas. Needless to say, more money also needs to be invested in education.

The Federal Government shouldn’t be slavishly sticking to its target of a balanced budget?

As a political budgetary objective, the “black zero” serves the educational purpose of ensuring sound finances. It’s worked so far. Of course, we shouldn’t fetishise it.


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