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Weidmann maintains burst of fire

Weidmann maintains burst of fire

Bundesbank not there to cheer people up
The Tietmeyer connection

by David Marsh

Mon 7 Jan 2013

A Bundesbank president is not in business to cheer people up, but to complain about things going wrong. In this vein, Jens Weidmann, the Bundesbank president, has started off the year in classic curmudgeonly mode, with a burst of fire about how the European debt crisis is far from over and the European Central Bank’s vaunted plan for bond purchases is unnecessary and counter-productive.

Asked by the conservative Frankfurter Allgemeine Zeitung (FAZ) newspaper – one of the Bundesbank’s staunchest supporters – whether the euro would have been damaged had the ECB not unveiled its so-called Outright Monetary Transactions programme (OMT) in mid-year, Weidmann bluntly said he didn’t think that was the case. ‘Policy-makers would have then had to take action. I am well aware that these are difficult decisions for policy-makers. But it is, after all, the job of policy-makers, and not the central bank, to decide on redistributing solvency risks in Europe. By taking action, the central bank takes pressure off policy-makers – a risky move.’

What difference do Weidmann’s strictures make? On some counts, this is standard carping to cover up the Bundesbank’s impotence. On this interpretation, the Bundesbank has been in retreat for 15 years. Some would say that the high point of Bundesbank power was as long ago as 1992-93 at the apogee of the crisis in the exchange rate mechanism, when old-style Bundesbank intransigence resulted in a sharp real revaluation of the D-Mark and a damaging German recession.

European monetary control has since moved to the ECB, where Weidmann is institutionally outvoted. Furthermore, Bundesbank-style hard-money rules on monetary union have been watered down. And to top it all, some predict that Chancellor Angela Merkel is simply waiting for victory in the September election to declare support for a full-scale European transfer union.

The view that Weidmann is simply moping ineffectually about the Bundesbank’s seminal loss of influence is however one-sided and exaggerated. For a start, the German elections will not be plain sailing for the German government – in spite of Merkel’s large lead in the polls. François Hollande, the French president, is likely to exacerbate differences with Merkel by giving fulsome support to her Social Democrat opponent, Peer Steinbrück. The better Merkel’s poll ratings, the worse the climate with Paris. Hardly a good trade-off for the Germans.

In the near term, well-publicised Bundesbank opposition to the OMT probably makes it unlikely to be used, at least in the form outlined four months ago by Mario Draghi, the ECB president. Weidmann has been saying for months that Europe is not on the way to political union, an opinion given credence by the lacklustre outcome of the EU’s December summit that greatly diluted a plan for greater economic and political cohesion.

So Europe’s deficit-ridden southern states cannot rely on hand-outs or transfers from German-led creditor countries but will simply have to keep up austerity to maintain the external rebalancing they have achieved in the past two years. The Bundesbank view is that, although some structural progress has been achieved in the peripheral states, any significant near-term pick-up in economic activity and incomes could rekindle imports and restart the spiral of unsustainable current account deficits.

In many cases the sizeable falls in real incomes that these states have suffered are more or less permanent. This may be economically valid, but is this a political message that these countries’ populations wish to hear?

Weidmann is well aware he’ll have a place in history. He wants to make sure it’s a good one. Probably more than any leading central bank chief in living memory, Weidmann peppers speeches and statements with the seemingly timeless lore of his predecessors.

In his New Year FAZ interview, Weidmann approvingly quotes two previous Bundesbank presidents, Karl Blessing and Otmar Emminger. The past president with whom Weidmann appears to have most empathy is Helmut Schlesinger, the redoubtable Bundesbank chief between 1991 and 1993, precisely double Weidmann’s age. However, there is also remarkable overlap with Hans Tietmeyer, Schlesinger’s successor, who headed the Bundesbank between 1993 and 1999 and warned on many occasions of the risks faced by a monetary union composed of unequal or non-convergent members.

Bundesbank continuity is underlined by the parallels between Weidmann’s present statements and speeches and Tietmeyer’s prognostications on the eve of monetary union in 1999. In a speech in November 1997, for example, Tietmeyer warned of ‘potential for disruptive forces in a monetary union’, and declared that, ‘A country with insufficient convergence could quickly reach the limits of its adaptability. Necessary severe cuts in the labour market or in public finances would weigh heavily on the acceptance of the euro.’

Tietmeyer’s predictions were prescient. Countries which entered monetary union with false hopes or false credentials can’t say they weren’t warned. Tietmeyer made his speeches mostly in German, largely for domestic consumption. No one was regularly translating the Bundesbank president’s speeches into English. Unlike today, when every one of Weidmann’s utterances is promptly rendered in English on the Bundesbank’s website. Hardly the actions of a man bowing his head towards relentless decline and graceful defeat. Weidmann is making clear he means to stand and fight.

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