‘Not all Germans believe in God, but they all believe in the Bundesbank’

Tall, soft-spoken and polite, Bundesbank boss Jens Weidmann tends to wear his responsibility lightly

Jens Weidmann:  “I assume that Ireland, now out of the programme, will be able to meet its commitments without any external assistance.” Photograph: Kai Pfaffenbach/Reuters

Jens Weidmann: “I assume that Ireland, now out of the programme, will be able to meet its commitments without any external assistance.” Photograph: Kai Pfaffenbach/Reuters

Fri, Jan 24, 2014, 07:35

The Bundesbank headquarters on the edge of Frankfurt is a brutalist bunker that exudes a forbidding air.

By the time it opened its doors here in 1972, the Bundesbank had been operational for 15 years and had established itself as a guardian of both the deutschmark and West German prosperity.

It anchored itself as one of the country’s most trusted institutions so effectively that former European Commission president Jacques Delors remarked in 1992: “Not all Germans believe in God, but they all believe in the Bundesbank.”

The recent euro crisis and subsequent rescue measures, from bailouts to bond-buying, have dented that belief and confirmed many Germans’ long-held fears about currency union.

The European Central Bank was established in the Bundesbank’s image but many here worry the son, having turned on the father, has now gone rogue. The Bundesbank, so the argument goes, has moved from being the euro system’s first-among-equals to its hostage.

Outside Germany, meanwhile, the Bundesbank has been attacked as always giving too little, too late in the euro crisis, with US economist Paul Krugmann dubbing the Bundesbank’s last president, Axel Weber, a “risk for the euro’s fate”.

This was the burden awaiting Jens Weidmann when, in 2011, the 45-year-old economist became the youngest president in the bank’s history after Prof Weber’s walkout in protest at ECB monetary policy under then president Jean-Claude Trichet, paving the way to Mario Draghi’s ECB presidency.

Tall, soft-spoken and polite, Dr Weidmann wears his responsibility lightly. Far less austere than either his predecessors in Frankfurt, or the Bundesbank’s exterior, a former economics professor remembers him as someone who “prefers taking partners to one side for a talk than banging on the table”.

Dr Weidmann jokes that, given his own run-ins with the ECB of late, not everyone will believe that assessment. But, even in fundamental conflicts, he says he tries to keep things professional.

“In trying to convince people and achieve something, it’s always better to exchange arguments than drift into personal conflict,” he said.

It’s a trait he shares with Angela Merkel, for whom he worked for five years as economic adviser in Berlin through the testing times of the financial and euro crises.

Since returning to Frankfurt, however, he has had to eschew the German leader’s trademark political pragmatism and don the doctrinaire cloak of the Bundesbank, where a stable currency is king, inflation control is queen and political influence on monetary policy is verboten.

While Dr Merkel welcomed Mr Draghi’s promise that the ECB would “do whatever it takes” to save the euro – calming financial markets in the process – Dr Weidmann warned that the subsequent “Outright Monetary Transactions” (OMT) bond-buying capability could trigger the ECB’s capture by politics.

That said, the German chancellor and her former adviser remain on the same page on the causes – and thus cures – of the euro crisis: as a crisis of debt to be solve not with more debt but with structural reform as a prerequisite for external financial assistance.

Selling this narrative to sceptial Europeans has been a challenge, particularly in Ireland where the debt crisis had its origins in the banking crisis. No less of a challenge for Dr Weidmann, however, is selling the idea of adjustment programmes to sceptical Germans who accepted the euro grudgingly on a “no-bailout” basis.

In the ECB governing council, Dr Weidmann says he backed ECB’s reform proposals to give politicians time to agree crisis policy. But he warns against embracing attempts to push a post-crisis world of monetary policy relativism.

Dr Weidmann argues the Bundesbank has been ready to adapt its thinking as needed and does not view its role in the crisis as a monetary policy pedant. But he thinks the euro area urgently needs a Bundesbank bulwark against “this time it’s different” arguments used to demolish the barrier between monetary and fiscal policy.

“Central banks’ financing of states runs like a red thread through history, and the dangers of this are many and well-known,” he said. “This is all the more true in a monetary union with one monetary policy and sovereign national fiscal policies.”

Another common crisis-era criticism of Germany – its demands for austerity measures from programmes – reveal a simplified view of German economic thinking, he says, and its recent economic history.

Germany is no stranger to anti-cyclical fiscal stimulus. It adopted expensive job-saving subsidies in the early days of the financial crisis. But Dr Weidmann says such state intervention only works when governments have carved out breathing space.

“When questions are being raised about government budgets and no one is ready to lend money, further spending is not necessarily the right way to restore trust,” he said.

Crisis of trust
“The crisis of trust in the euro area . . . forced countries to demonstrate, credibly, that they were ready to return to the path of sustainable public finances and not to merely fight debt with debt.”

In the current ECB interest rate debate, Dr Weidmann has expressed concern that an extended period of low interest rates could, in Germany’s case, contribute to a nascent property bubble. In Ireland’s case, Dr Weidmann warns that cheap money must not be used to postpone reform – particularly of the financial sector.

So what of Dublin’s argument that it deserves a break from its EU partners on legacy bank debt, given that the door now open to debt write-downs in the euro zone was held shut by ex-ECB president Jean- Claude Trichet back in 2010? This is where things get interesting. Then the ECB governing council debate weighed up the benefit to Ireland of allowing bail-in of its creditors – reducing the final crisis bill for Irish taxpayers – with potentially wider financial stability risks to the euro such a move might trigger. The majority of the governing council followed Trichet’s position in 2010, was that the risk was too big to take. Not the Bundesbank.

“In that debate, the Bundesbank has always considered it important to make investors bear the risks of their investment decisions,” said Dr Weidmann. “And already then [it] favoured contributions of investors in the event of solvency problems, especially for banks that are to be wound down.”

That revelation challenges the popular crisis narrative in Ireland: that, after German banks lent recklessly and disproportionately into Ireland, German officials sprang into action to demand repayment in full of all German investments.

The Bundesbank says it was largely alone in backing Ireland’s view that the principle of shared liability should be maintained, even in exceptional circumstances.

Support for Ireland
At the same time, Dr Weidmann was a loud critic of last year’s ECB promissory note deal to Ireland, viewing it as a dangerous blurring of monetary and fiscal policy.

However, he concedes that “some might consider the transaction as a kind of a compensation for the Irish support to its banking system”.

And what of the future? Though anxious to stay out of the political debate over further debt concessions to Ireland, he concedes that Ireland’s 120 per cent debt-to-GDP ratio remains a “shadow” over the country’s economy. So will Ireland be left alone with its bank legacy or will assistance come from European partners?

Dr Weidmann suggests that recent European agreements “have made clear that legacy bank debt remains a primarily national responsibility.

“I assume that Ireland, now out of the programme, will be able to meet its commitments without any external assistance,” he said. “I don’t think it is in Ireland’s interest now to raise doubts about its readiness to service its debt.”

Dr Weidmann acknowledges the potentially corrosive legacy of the euro crisis but argues that finger-pointing debate over who picked up the tab for whom is a hindrance rather than a help to real debate about how to prevent a new crisis.

Yet he is quick to dismiss what many EU partners see as an effective backstop: shared liability or so-called eurobonds. Sharing Germany’s top credit rating to reduce others’ borrowing costs cannot come, he says, before institutional safeguards are in place. Without safeguards, he said, “the account will soon be overdrawn”.

After three challenging years, Dr Weidmann insists the Bundesbank continues to have an important voice in the Eurosystem concert. But new tensions could loom, particularly if the ECB drifts further away from Bundesbank thinking, such as to active the OMT bond-buying.

For Dr Weidmann and his central bank, the moment of truth in the euro crisis may still be ahead. He insists he is anxious to break a recent tradition among Germans in top jobs.

“After the recent premature resignations of a German ECB chief economist, the Bundesbank president and two German presidents,” he said, “I have no interest in joining this line-up.”