Weidmann: Sound public finances shield monetary policy

Jens Weidmann at a senate reception at Hamburg's Town Hall to mark the Bundesbank's 60th anniversary ©Michael Zapf
Bundesbank President Jens Weidmann has called on the euro-area countries to embrace fiscal prudence. Speaking at a senate reception at Hamburg's Town Hall to mark the Bundesbank's 60th anniversary, he said that the tighter the fiscal space, the more central banks will come under political pressure to stabilise economic activity in the short run – even if that does mean compromising on price stability.

The feeble inflationary pressure is currently posing a major challenge for the Governing Council of the European Central Bank (ECB), Mr Weidmann continued, noting that although the upswing has now gained both momentum and breadth, inflation looks set to climb at no more than a sluggish pace, judging by the latest projections. Uncertainty surrounding the future path of inflation is "fairly substantial", he said. "That is why the ECB Governing Council has decided to wait until it can assess the monetary policy situation calmly."

Bond purchases an emergency tool

To move inflation back towards the target rate of below, but close to, 2%, the ECB has successively reduced its policy rates to 0% over the past years and additionally rolled out extensive government and corporate bond purchases.

Jens Weidmann at a senate reception at Hamburg's Town Hall to mark the Bundesbank's 60th anniversary ©Michael Zapf
But as Mr Weidmann also pointed out, the government bond purchases risk blurring the lines between monetary and fiscal policy and are in his view nothing more than an emergency tool which should be used for staving off a dangerous deflationary downward spiral of declining prices and wages. "However, I considered this risk to be low even at the beginning of the bond purchases, and since then, it has all but disappeared," he remarked. In his words, the Bundesbank has at least successfully argued that, under the current government bond purchase programme, it should only buy German bonds and not those of euro-area countries with poor credit ratings. "So unlike under the earlier SMP programme the balance sheets of Eurosystem central banks are, for the most part, not being used to communitise solvency risk."

Sights remain set on stability

The Bundesbank president also used his speech in Hamburg to look back at the history of the Bundesbank, naming three factors which have been instrumental in the institution's achievements over the past 60 years. One is the narrow central bank mandate to preserve price stability and independence from political interference. After all, monetary policymakers need to be able to achieve their price stability objective even against the resistance of politicians, Mr Weidmann argued. The other two factors are the strict segregation of monetary and fiscal policy, and the general public's awareness of the merits of stability. 

Mr Weidmann said that these three pillars helped the Bundesbank to keep the Deutsche Mark stable for decades. Though the playing field in which the Bundesbank operates has remained in constant flux, the Bundesbank president made quite clear that the main thrust of its monetary policy stance has remained steadfast, saying: "our sights are set on stability, and always will be."

Trust – a priceless asset

Another speaker at the reception was Hamburg's First Mayor, Olaf Scholz, who hailed the Bundesbank as one of the Federal Republic's foremost institutions and one of the most important central banks worldwide. "The Bundesbank is a source of trust," Mr Scholz said, "and trust in banks is a priceless asset."

The German general public's deep-seated confidence in the Bundesbank also featured strongly in the speech delivered by Arno Bäcker, President of the Bundesbank's Regional Office in Hamburg, Mecklenburg-West Pomerania and Schleswig-Holstein. The Regional Office, Mr Bäcker said, plays a major role in cementing the public's confidence in the Bundesbank, and its outreach events and its increased focus on economic education initiatives in Hamburg, Mecklenburg-West Pomerania and Schleswig-Holstein further strengthen the bond between the general public and the Bank.