The Karl Otto Pöhl guide to central banking
Six precepts from the Bundesbank president who died last week
by David Marsh
Mon 15 Dec 2014
Karl Otto Pöhl, president of the German Bundesbank for 11½ tumultuous years between 1980 and 1991, who died last week, was a man who deserved the epithet ‘legendary’. He criss-crossed the worlds of politics, finance, academe and the media, while managing to remain somehow above them all.
His spirit of nonchalant hedonism was partly a reaction to, and escape from, a miserable childhood. Born in December 1929 just weeks after the Wall Street crash, Pöhl saw his family suffer from the international depression and then the second world war, as the bombs rained down on his native Hanover in northern Germany. Both Pöhl and Helmut Kohl, who later became an adversary, witnessed as 18-year olds the June 1948 currency reform that ushered in West German renewal as the D-Mark swept away the war-shattered Reichsmark.
Pöhl’s life displays precepts that belong to the lexicon of guides to central banking style, performance and behaviour. Whether your name is Mark Carney or Janet Yellen or Haruhiko Kuroda or Mario Draghi – and certainly if it is Jens Weidmann, the current Bundesbank incumbent – you can learn a lesson or two from Karl Otto Pöhl. Here are six of them.
Stay true to your institution. Pöhl was not Helmut Schmidt’s first choice for Bundesbank president in 1980. The West German chancellor favoured Deutsche Bank head Wilfried Guth. But, when Guth declined, Schmidt awarded his former protégé the top job. Schmidt expected a certain understanding from the man he had appointed as state secretary to the Bonn finance ministry at Christmas 1972, plunging him into dealing with a string of high-level international monetary emergencies. When West Germany started to suffer from a weaker D-Mark from 1979 onwards, partly as a result of undue monetary easing in 1977-78, Pöhl, first as Bundesbank vice president and then from 1980 as its chief, had no choice but to uphold the Bundesbank’s twin principles of price stability and independence. He tightened the monetary screw, in spite of protests from his former mentor. Schmidt made a vain private attempt to win Bundesbank compliance, and launched a public broadside against the Bundesbank’s ‘deflation’ when he bowed out of office in October 1982. But he admitted later that he should have gone a year later.
Watch out for politics. Pöhl had a head for political intrigue, but a non-sentimental attitude both to German reunification in 1990 and the monetary unification of Europe that it catalysed. He got caught out when the timetable for both accelerated from 1989 onwards. Pöhl’s gravest, and most embarrassing, miscalculation came in February 1990 when he said in East Berlin it would be ‘premature’ to consider ‘such a far-reaching step’ as monetary union between East and West Germany. He was unaware that, at precisely the same time, Schmidt’s successor Helmut Kohl – who was starting to take a partisan dislike to Pöhl's plain speaking on the economic dangers of German unity – was making up his mind without warning to extend the D-Mark to the east. All this was a major factor behind Pöhl’s decision prematurely to quit the Bundesbank in May 1991.
Don’t rely too much on the people who appoint you. Pöhl provides a prime example of the ‘Becket effect’, named after the saga of English King Henry II’s chancellor Thomas à Becket, who opposed the King after he was appointed, and was murdered for his pains. Outsiders brought into the Bundesbank, often if they have a political career behind them, usually end up far more wedded than expected to stubborn-minded independence, a process seen, too, in the Banque de France. As a member of the Social Democratic Party, Pöhl was flattered when Christian Democrat Chancellor Kohl reappointed him for a second eight-year term from January 1988 – even though he never forgot that Bavarian Christian Social Union finance minister Theo Waigel opposed him. Pöhl was irritated when Kohl telephoned him in December 1987 to encourage the Bundesbank to cut interest rates, in an internationally coordinated plan for economic stimulus after the October 1987 stock market crash. Pöhl had little option but to comply, although he later regretted it as helping stoke overheated West German expansion – marking the start of a progressive brittleness with Kohl. In the end, Pöhl finished with the hard-worn distinction of falling out with the two German chancellors who appointed him – a bittersweet badge of central banking honour.
Get lucky with your No. 2. The politicians who usually appoint deputy governors need to ensure the duo is complementary. Pöhl developed a close relationship with his five years-older vice-president, Helmut Schlesinger, now 90, who succeeded him for two action-packed years in 1991-93. Schlesinger was everything Pöhl was not: politically conservative, a career Bundesbank official wedded to the institution, ascetic, intellectually rigid, perhaps a little dull. Both could pay copious attention to detail: Pöhl, when it suited him, Schlesinger, as a matter of course. Despite these differences, Pöhl soon discovered that Schlesinger was a man of integrity, dry humour and wisdom whom he could – and did – trust. For all his alleged dourness, Schlesinger had an intuition for dealing with instinct-driven politicians like Kohl that cerebrally-minded Pöhl lacked. Pöhl used to write Kohl well-phrased letters (which Kohl seldom acknowledged, let alone answered); Schlesinger visited him for a heart-to-heart chat. Schlesinger’s inflexible honesty in not being able to stop or correct publication to news agencies of an explosively abbreviated version of an interview he gave to the Handelsblatt and Wall Street Journal on 15 September 1992 was the proximate cause for the next day’s departure of Britain (and Italy) from the exchange rate mechanism of the European Monetary System. Had the Pöhl-Schlesinger tandem been in charge, that might still have happened – but in a less rancorous way.
Be careful about being right. Pöhl’s breezy self-confidence and facility with the English language won friends and admirers abroad, but bred antagonism at home. His detailed letters and documents in the Bundesbank archives, relating for instance to preparations for the European Monetary System in 1977-78, or his pointed interventions in policy-making Bundesbank council meetings (in his capacity as state secretary he took part in 21 such meetings in 1973-76), underline his capacity for hard, detailed work. But his straight-talking could get him into trouble. In March 1991, speaking in Brussels to a European parliament committee in English (in which he was less circumspect than in German), Pöhl stated that East Germany had been ill-prepared for monetary union with the west, and the results had been a ‘disaster’. The comments were designed to back up Pöhl’s views that, if Europe proceeded too quickly towards a single European currency, countries that were not ready to take the burden of unification with the hard currency D-Mark would suffer from widespread loss of competitiveness and soaring unemployment – just as East Germany had done. The remarks were correct, prescient and prophetic. Yet, transmitted by agency reporters to the foreign exchange markets, the language caused financial uproar and political consternation in Bonn. Kohl, visibly upset, submitted Pöhl to an unusual public reprimand, one more step towards his resignation only two months later.
Mind your back. One of the reasons why Pöhl became progressively disenamoured with the Bundesbank was the gap between his apparently effortless potency on the world stage and rumbustious domestic realities. In the 13th floor Bundesbank council parlour, Pöhl’s hands were becoming increasingly tied by a restive 18-strong group acting on the principle of ‘one man, one vote’ (there were no women). On the differences with Kohl over monetary union, especially over the generous exchange rate for introduction of the D-Mark into East Germany in July 1990, as well as over the pace towards European economic and monetary union, disagreements on the council kept bursting through into public statements, leading to hot-headed disagreement even with council members who should have been Pöhl's natural allies. Similar discord erupted over emotion-charged plans to streamline the Bundesbank’s cumbersome decision-making structure. In his efforts to avoid over-straining delicate relationships with Kohl and elsewhere in Europe, for example, by keeping the Bundesbank’s leading interest rates unchanged in the crucial period between the fall of the Berlin wall in November 1989 and German unification (and Britain’s ERM entry) in October 1990, Pöhl appeared to be losing a battle for independence within the council itself. Today’s central bank governors, perhaps most of all Mario Draghi at the European Central Bank, face similar fraught balancing acts between in-house decision-making bodies and international expectations and obligations. Pöhl used to quip about the difficulty of making predictions, especially on the future. The sole piece of advice Pöhl would give his successors is that there are no easy answers.
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