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Weidmann: Trust is a central bank’s most valuable asset

Weidmann: Trust is a central bank’s most valuable asset

Bundesbank President Jens Weidmann has underscored the importance of central banks’ independence to their success. Both economic theory and history have shown that independent central banks are better equipped to keep inflation in check, he said in a speech in Pretoria. “In order to defend their independence, central banks should interpret their mandates narrowly and seek the support of the broad public,” Mr Weidmann remarked.

Euro area not yet crisis-proof

With regard to the financial and sovereign debt crisis in the euro, Mr Weidmann referred to the ongoing need for reform. Besides macroeconomic imbalances in euro area member states, he pointed out that the crisis was also borne out of weaknesses in the institutional framework of monetary union. “The euro had an easy childhood but difficult teenage years,” the Bundesbank president said with reference to the single currency, which recently turned 20. Mr Weidmann pointed out that there have been important improvements, and explicitly mentioned the establishment of a permanent euro rescue facility and the creation of a European banking supervision. “Yet we have not yet done enough to crisis-proof the euro area once and for all,” Mr Weidmann warned. He explained that further measures are needed in order to give the European fiscal rules the necessary credibility, for example, and to sever the harmful sovereign-bank nexus. “The unfinished business of euro area reform entails risks for the Eurosystem,” Mr Weidmann warned further, as monetary policy could be forced to act as a crisis response unit again in future. That, he continued, could make it more difficult for the European Central Bank (ECB) to focus on its promise of a stable currency.

Knowledge creates trust

In his speech, Mr Weidmann emphasised how important the public’s trust in central banks’ work is, adding that although trust is not to be found on a central bank’s balance sheet, it is ultimately a central bank’s most valuable asset. “People’s trust gives us scope to take decisions that are not always popular in the short run,” Mr Weidmann said. Yet it is the central banks’ job he added, to explain to the people in a comprehensible way why their work is nevertheless beneficial for society.

In this connection, the Bundesbank president spoke of the importance of knowledge in building trust. “Surveys,” he said, “show that knowledge about central bank and monetary policy has a positive impact on trust in the central bank.” He went on to say that effective monetary policy communication can only function if people have a basic grasp of concepts such as inflation and interest rates. For this reason, he said, the Bundesbank is strongly engaged in the field of economic education, for instance by organising seminars for teachers and school classes and running a money museum.

The euro turns 20

Speaking of the euro’s twentieth anniversary, Mr Weidmann called the stability of the single European currency a success. He pointed out that the average euro area inflation rate over the last 20 years was 1.7% per year, while the ECB Governing Council’s definition of price stability is “below but close to 2%”. “Compared with its legacy currencies like the Deutsche Mark or the French franc, the euro is even more of a stable currency,” Mr Weidmann concluded.

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