Weidmann: "Maintaining stability is a never-ending task"
Bundesbank President Jens Weidmann has warned against the dangers of the Eurosystem backtracking on its primary objective of maintaining price stability, calling it a move that could ultimately jeopardise a central bank's independence. Speaking at an event held in honour of Karl-Otto Pöhl, the former Bundesbank President who died in 2014, Mr Weidmann told the roughly 200 guests that independence was crucial if central banks were to pursue price stability without undue political interference.
Mr Weidmann reminded the audience of Mr Pöhl's achievements during his tenure as Bundesbank President between 1980 and 1991, explaining how during his term of office, Mr Pöhl had been instrumental in not only maintaining the Bundesbank's independence but also making it a template for the Statute of the European Central Bank (ECB). This Statute had been drafted by the governors of European central banks in the run-up to European monetary union under the chairmanship of Mr Pöhl, and it was annexed as a Protocol to the Maastricht Treaty, which in 1992 first outlined the operations and tasks of the ECB. Maintaining central bank independence during that period was something that Pöhl himself once hailed as his most important personal achievement, Mr Weidmann noted.
During his period of office, Mr Pöhl defended the Bundesbank's independence and the price stability of the Deutsche Mark against political resistance from many quarters. One instance was in the early 1980s, when he fended off claims by the then Federal Chancellor Helmut Schmidt that the Bundesbank's restrictive monetary policy stance was geared too strongly to driving up the external value of the Deutsche Mark. Facing down such political reservations, Mr Pöhl stayed true to a policy of keeping the money supply expensive and scarce, and kept the Bundesbank on course to maintain the monetary stability of the Deutsche Mark. And the Deutsche Mark did indeed prove to be a stable currency for many years.
Don't call central bank independence into question
"The federal republic of Germany owes so much to a successful stability policy [...] that it would be foolish to renounce it in favour of other objectives or to even consider tampering with it. This applies in equal measure to what is – without a doubt – an important political objective: the creation of a European currency. One which is issued and whose value is safeguarded by a European central bank," Mr Weidmann cited from a Pöhl speech from 1988. Mr Weidmann explained how Karl-Otto Pöhl was quite open to European integration, though not a fervent advocate of a single currency.
"And not because he feared that the Bundesbank would lose power as a result, but because he had reservations about the stability of the currency," Mr Weidmann said.
The current Bundesbank President explained how these two factors – the importance of independence and the primacy of price stability – were as pressing today as they had ever been. A central bank that did not gear its policymaking exclusively to the goal of price stability but which also sought to cushion the negative fallout of structural problems ultimately encouraged other policymakers to make less of an effort themselves, Mr Weidmann cautioned. These remarks put Mr Weidmann at odds with commentators such as the economist Joseph Stiglitz, who had recently called into question the independence of central banks. Mr Weidmann explained how backtracking on central bank independence could reduce macroeconomic welfare. At the end of the day, he noted, it was not the central bank but only general policymaking in the shape of growth-enhancing structural reforms and sustainable public finances that could lay the groundwork for lasting growth.
Government bond purchases bring fiscal and monetary policy closer together
This is why Mr Weidmann is fundamentally concerned about the overly close relationship between monetary and fiscal policy.
"Government bond purchases are particularly conducive to moving monetary and fiscal policy closer together because they make central banks the member states' biggest creditor," the Bundesbank President noted. High levels of debt and what appears to be mounting consolidation fatigue in a number of European countries will not make it easy to close the current chapter on ultra-easy money further down the line.
"There´s a risk that some countries´ finance ministers will get used to the idea that there isn´t much of a downside to maintaining high levels of public debt," Mr Weidmann stated.
To prevent monetary policymakers from repeatedly being forced to pick up the pieces in times of crisis, he explained, it was necessary to not only take a narrow interpretation of the price stability mandate but to also put effective procedures in place for a stable financial system, sound public finances and competitive economies. After all, he reasoned, the success of monetary policy also hinged on factors over which central banks have no control, such as the state of public finances and a competitive economic structure. The Bundesbank President proposed the creation of an independent European fiscal authority to improve the monitoring of fiscal discipline in the euro-area member states. This body could take on the fiscal surveillance duties currently performed by the European Commission.
"It would be more suited to guaranteeing objective oversight and transparent and comprehensible analysis without being distracted by other policy matters," Mr Weidmann told his audience.
Other speakers at this event, the inaugural Karl-Otto Pöhl Lecture, included Mr Pöhl's long-standing assistant Rüdiger von Rosen and former Chairman of the US Federal Reserve System (FED), Paul Volcker. Watch their speeches in the video.