Bundesbank President on ECB Bond Purchases: 'Too Close to State Financing Via the Money Press'
Jens Weidmann, the 44-year-old head of Germany's central bank, has made a name for himself by championing price stability and opposing bond purchases by the European Central Bank. In a SPIEGEL interview, he criticizes the ECB's latest plans and insists he only wants to secure the euro's long-term future.
SPIEGEL: Mr. Weidmann, US President Barack Obama reportedly asked German Chancellor Angela Merkel for your phone number. Has he already called you?
Weidmann: I haven't received a call from President Obama. I occasionally talk on the phone with US Treasury Secretary Timothy Geithner, though. It's an important part of my job to promote the positions of the Bundesbank during conversations with monetary and financial policy makers from around the world.
SPIEGEL: That doesn't appear to have been particularly fruitful. In all Western capital cities, from Washington to London, and from Paris to Rome, you are regarded as the man who wants to destroy the euro. Is this allegation justified?
Weidmann: No, not at all. I want to help ensure that the euro remains a stable currency. The framework for this is laid out primarily by the Maastricht Treaty, with its rules and conditions for European financial and monetary policy. I take that as my yardstick.
SPIEGEL: But the framework doesn't work anymore.
Weidmann: The framework has been stretched and, in some cases, disregarded. But as long as the political consensus is lacking and a new framework -- such as a genuine political union -- has not been approved, we will have to adhere to what has been agreed. One of the purposes of the Maastricht rules is to prevent the consequences of poor budgetary policy from being passed on to others. With 17 countries that insist on their sovereignty in budgetary matters, you need such rules, otherwise there's no incentive for sound management. Consequently, at least for the time being, we have to make a concerted effort to improve the Maastricht framework and make it valid again.
SPIEGEL: The governments of the European Union take a similar view and have approved the fiscal pact, which will allow Brussels to more effectively monitor individual national budgets. Is this the right approach?
Weidmann: It's definitely a step in the right direction, but that alone is not enough. The causes of the crisis lie in the high level of indebtedness, the lack of competitiveness of some member states and, last but not least, the lost confidence in the architecture of the monetary union. These fundamental problems must all be tackled rigorously, without hesitation, and with perseverance. This will contribute to the cohesiveness and credibility of the monetary union.
SPIEGEL: But that's already happening. Government spending is being reduced and reforms are being introduced across Southern Europe, but the financial markets don't seem to recognize this progress and are pushing up interest rates on sovereign bonds to dizzying heights. Why are you opposed to European Central Bank (ECB) President Mario Draghi's plans to purchase large quantities of Southern European sovereign bonds to ease the situation?
Weidmann: I was already critical of the sovereign bond purchases that have been made to date -- and I was by no means alone in that respect. Such a policy is too close to state financing via the money press for me. The central bank cannot fundamentally solve the problems this way. It runs the risk of creating new problems.
SPIEGEL: Isn't it necessary to occasionally break dogma to prevent something worse from happening?
Weidmann: It's not about dogma. It's about reinstituting confidence during a crisis of confidence, and it's about key monetary policy lessons from the past.
SPIEGEL: Now you're going to refer to the German hyperinflation of 1923 again.
Weidmann: No, lessons from European postwar history are reflected in the Maastricht Treaty. During the 1970s, the central banks of many Western industrialized nations were chained to economic and fiscal policies. The idea was that it's better to have 5 percent inflation than 5 percent unemployment. This resulted in inflation and unemployment rising simultaneously. Based on such experiences, the Eurosystem (ed's note: the ECB and the central banks of the euro-zone members) was aimed solely at the objective of achieving monetary stability, in accordance with the traditions of the Bundesbank.
SPIEGEL: Do you mean that if the rest of Europe were to follow the German example then everything would be fine?
Weidmann: Not at all, it has to do with successful monetary policy principles, and it just so happens that the Bundesbank in particular has apparently succeeded in building up an enormous amount of confidence. It has proved effective for a central bank to remain independent of financial policy and not finance government budgets. These principles are not an end in themselves -- rather, they are designed to prevent the central bank from running the risk of neglecting its key mission: keeping prices stable. In the 1970s, a number of countries that are now members of the monetary union experienced double-digit inflation. Remember the story of the Banca d'Italia: how hard it had to fight to free itself of the clutches of the Finance Ministry, and how this was then rightly celebrated as a great success.
SPIEGEL: The Bundesbank has already purchased sovereign bonds once in the past, when things got tight.
Weidmann: That was also during the 1970s. The extent of these purchases was smaller than elsewhere, and the government debt was significantly lower. Nevertheless, the Bundesbank apparently recognized this as a mistake, which it subsequently corrected.
SPIEGEL: That may have been the right policy for that point in time. But there is currently no sign of inflation anywhere in Europe, and practically every politician in Europe is calling for support from the central bank. Doesn't that give you pause?
Weidmann: I also see no immediate threat of inflation. But if monetary policy allows itself to be used as a comprehensive political problem solver, its real objective threatens to recede increasingly into the background. Stable prices not only ensure that the market economy works better. They also create a foundation that companies looking to invest can use to make reliable calculations. They protect the financial assets of savers. They ensure that people can still live from their income tomorrow. In that respect, a stability-oriented policy is the best social policy.
SPIEGEL: That's no different in the US. Nonetheless, to combat the financial and economic crisis, the US Federal Reserve has acquired large quantities of US government bonds without causing much concern. Doesn't that influence your thinking at all?
Weidmann: The comparison is misleading. The Fed is not bailing out a cash-strapped country. It's also not distributing risks among the taxpayers of individual countries. It's purchasing bonds issued by a central government with an excellent credit rating. It doesn't touch Californian bonds or bonds from other US states. That's completely different from what we have in Europe.
SPIEGEL: How so?
Weidmann: When the central banks of the euro zone purchase the sovereign bonds of individual countries, these bonds end up on the Eurosystem's balance sheet. Ultimately the taxpayers of all other countries have to take responsibility for this. In democracies, it's the parliaments that should decide on such a far-reaching collectivization of risks, and not the central banks. Europe is proud of its democratic principles; they characterize European identity. That's something else that we should bear in mind.
SPIEGEL: Your colleague at the ECB, Jörg Asmussen, with whom you studied at university and worked together for the German government for a long time, says "stability policy" is about not allowing any doubt whatsoever to arise concerning the currency and its continued existence. Would you say he's right?
Weidmann: I totally agree with Jörg Asmussen that no doubt can be allowed to arise concerning the character of the euro as a stable currency and its continued existence. This is precisely why we shouldn't act according to the motto "necessity knows no laws." There are good reasons why we have clearly defined, separate areas of responsibility. The central bank is responsible for monetary stability, while national and European politicians decide on the composition of the monetary union. It wasn't the central banks that decided which countries are allowed to join the monetary union, but rather the governments.
SPIEGEL: Are you implying that some member states would have to leave the euro zone under certain circumstances?
- Part 1: 'Too Close to State Financing Via the Money Press'
- Part 2: 'Germany Has Taken on Considerable Risks'
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