Discover more from The German Review
Farewell to the Frankfurt falcon
A hawk among doves
Wednesday’s announcement came completely out of the blue.
Jens Weidmann, the dependably hawkish head of the Bundesbank, told staff at the headquarters in Frankfurt that he was calling it a day. “I have come to the conclusion that after 10 years it is the right time to turn over a new leaf - for the Bundesbank, but also for me personally,” he said.
Weidmann said that the decision had been made for personal reasons. He made no mention of years of disagreement with the other 24 members of the ECB governing board, which is constituted of the heads of the 19 eurozone central banks plus the ECB executive board.
But few observers believe that he is moving on because he no longer felt fulfilled in the role. He was re-named as Bundesbank just two years ago. It is strange that he would resign now.
Despite a reputation abroad for being a troublemaker, in Germany the 52 year old is seen as a tactful man who is constitutionally incapable of making a scene on his way out the door.
But it’s no secret that he had major differences with other European central bankers over the ECB’s policy of pumping cheap money into the economy since the sovereign debt crises of 2010.
Along with colleagues from a few northern neighbours, Weidmann found himself in a lonely minority on the ECB’s governing council, where he was repeatedly outvoted.
Why he chose to go now is unclear. Perhaps he finally conceded that his warnings of financial irresponsibility weren’t cutting through.
A comparison of the speech that he gave on assuming the post in 2011 and his resignation letter on Wednesday shows striking similarities. Then as now he appealed for an end to “emergency” money lending, saying that it risked making the central bank a slave to irresponsible government spending.
With decisive battles now approaching over how to deal with rising inflation, Weidmann seems to have decided that it is the right time to let someone else take up the fight.
No free lunch
Weidmann is not the first German representative at the ECB to throw in the towel over loose monetary policy.
His predecessor, Axel Weber, resigned for similar reasons in 2011 and he was soon followed by Jürgen Stark, Chief Economist of the ECB. Both men disapproved of the central bank’s policies of buying government bonds and loaning cheap money to financial institutions.
Just to recap: the ECB was set up in 1998 with the task of maintaining price stability in the eurozone. For the first ten years of its existence, it quietly went about this job by keeping inflation just below two percent.
Then, when southern Europeans states looked incapable of meeting mounting debt obligations in the wake of the 2008 financial crisis, the ECB took on a role that was far more controversial. In 2010 it started buying sovereign bonds in order to stave off debt defaults in the south of the eurozone.
Since then the ECB has injected trillions of euros into the eurozone economy through its bond purchase schemes, which are widely viewed to have prevented a full blown economic crisis in the Mediterranean states. From the very start, German central bankers were highly critical of these schemes.
So, why are German economists so wary of expansionist monetary policy?
Their arguments can be summed up as follows:
By giving states like Greece and Italy access to easy money, the ECB is incentivizing lax fiscal policy rather than policies aimed at reducing debt. Thus it is not a long-term cure for southern Europe’s woes. Meanwhile German taxpayers carry the risk for the bonds the ECB buys off them.
Low interest rates encourage risky investments, thus increasing the chances of bubbles developing in the property and stock markets. The steep rise in property prices in recent years is seen as a direct result of the ECB’s monetary policy. Similarly, economists watch how fast the DAX has grown in comparison with real economic growth since 2010 and see a bubble that will eventually burst.
Germans are being “silently disenfranchised” through a devaluation of fixed-term savings accounts and government bonds. The ECB’s negative interest rates have led to below-inflation interest rates on savings accounts and to negative bond yields. Thus Germans have nowhere safe to put their money where it won’t be eaten up by inflation. Their only option is the stock market, which is seen as high risk.
The ECB’s official definition of inflation does not include property prices and is thus hiding the true costs of its monetary policies. Middle income earners are being priced out of the market. This in turn is contributing to a rise in popularity of populist parties due to growing anger at a financial system that favours the wealthiest.
Cheap money damages productivity by keeping uncompetitive companies alive.
Germans understand why the ECB is following a loose monetary policy - they know full well that Greece, Italy and other southern countries would struggle to meet debt obligations if the cost of borrowing went back up.
At the same time, there is a worry that all of this is just delaying the inevitable. At some point the stock market bubble will burst. And when it does it will set off a chain reaction with unpredictable consequences.
These concerns are even shared by Germany’s Constitutional Court, which last year ordered the Bundesbank to stop financing the ECB’s bond purchases until the European bank established ‘proportionality’ based on the negative consequences for pensions, property prices and savings.
The Verfassungsgericht’s ruling caused anger in Brussels, where one expert complained that: “These are criteria that define proportionality according to German interests.”
‘We need a new hardliner’
Germany is often seen as a “dove” on international issues such as military interventions, migration and human rights. When it comes to finances though, the hawks patrol the skies.
The Süddeutsche Zeitung (SZ), a leading liberal broadsheet, harangued Weidmann this week for resigning without letting his true feelings be known.
“If he had fundamental doubts about the ECB's policy, if he saw the central bank as heading for the abyss at Germany’s expense, then now would have been precisely the time to make his opinions known,” Marc Beise, the SZ’s economics editor, wrote.
Beise said that the Bundesbank needed to stick to its conservative instincts. “It would be wise to appoint another hardliner as Weidmann's successor - someone who will challenge the next government on a daily basis.”
Surprisingly, business daily Handelsblatt was the one newspaper to strike a more conciliatory tone.
“The Bundesbank should become more pragmatic,” correspondent Jan Mallien argued. “Insisting on principles that are supposed to ensure stability can also jeopardize stability in times of crisis… …at such moments, the Bundesbank has not always been helpful.”
The name most often cited as a potential successor to Weidmann is Isabel Schnabel, a former economics professor at the University of Bonn who became one of the ECB’s six executive board members last year.
She is widely viewed as being more favourable to expansive monetary than most of her German peers.
And with the next German government planning a massive investment programme in green technologies, the German government is also unlikely to be too keen on fiscal belt tightening in the near future.