“Not all Germans believe in God, but all believe in the Bundesbank.” This oft-repeated quip by Jacques Delors, then president of the EU Commission, sums up the near-divine standing of the German central bank with the German public and its hard-currency allies. Typically, these allies included more central bankers than politicians. With astounding regularity, the latter would lob verbal salvos at the Bundesbank in the wake of unpopular policy decisions (ie, unpopular for the politicians). And as so often, very many of them were abroad, fuming over a Bundesbank policy move that spoiled their day by sending interest rates, currencies or securities markets not in the direction they wanted.
Ever since its founding 60 years ago, the Bundesbank has taken the blowback in its stride. Its split-screen image, its council members know, is something that is part of the job. The preceding institution, a caretaker central bank set up by the occupying Allies, had already weathered criticism of its policy independence by none less than Konrad Adenauer, Germany’s first post-war chancellor. After the demise in 1971 of the Bretton-Woods system which tied the value of the US dollar to the gold price, the German central bank began to set monetary goals, and stuck to them; a modest level of inflation was also targeted.
Axel Weber, a former president of the Bundesbank, said in a speech marking the anniversary: “Monetary and fiscal policy that is geared towards stability is a requirement for stable money, and stable money is the basis for a stable economy and a stable society. The Bundesbank has advocated this successfully for 60 years, and it needs to continue advocating it, not only for the good of Germany but for the good of the entire monetary union.”
At twice-monthly policy meetings, held in its drab, 1960s headquarters in Frankfurt, the Bundesbank would usually announce a change, or no change, in its leading interest rates, and its explanations were peppered with references to these operational targets. The outcome, especially in times of financial turmoil, invariably brought forth streams of vitriol from other European countries. “Arrogant Teutons!” or similar was the outraged cry of London tabloids, predictably railing at the Bundesbank.
Not that the Bundesbank always showed particular finesse in its communications. This correspondent recalls how, at the height of the 1993 currency crisis in Europe’s Exchange-Rate Mechanism (precursor to the euro), the Bundesbank unexpectedly raised a key lending rate. Financial markets had been expecting a cut, to prop up the ailing British pound. The German tightening was meant to signal stability, but the Bundesbank had misread the markets’ mood; the news sent sterling into a spin before it ultimately tumbled out of the ERM. The Bundesbank’s then-president Helmut Schlesinger, a professor with owl-like spectacles, appeared puzzled by the explosive response.
In the meanwhile, the Bundesbank is accused of living off its past successes and not looking enough towards the future, particularly with regard to Europe. Questions are being asked about why it still has almost 10,000 employees, many more than other central banks that merely fulfill a regional, ancillary function.
The Bundesbank was founded on August 1, 1957 as the successor to the Bank deutscher Länder (Bank of German States), created in 1948. Germany’s rapid reconstruction and development after World War II, known as Germany’s “economic miracle,” gave the country new confidence and a kind of West German identity, even as reunification with East Germany always remained the official political goal.
The central bank – whose officials came to be known as Währungshüter, or guardians of the currency – became the nation’s economic conscience. It championed thriftiness and a cautious wage policy; the stability of Germany’s new deutsche mark won a lot of respect from other countries. The power of the Bundesbank was felt right across Europe and was sometimes feared, as it repeatedly forced countries with weaker currencies to devalue.
Many Germans were lukewarm about the euro’s introduction in 2002, as conflicts in interest within the currency bloc seemed too great. France, in particular, was keen to break the deutsche mark’s supremacy. Ultimately, however, the new European Central Bank (ECB) not only ended up being located close to the Bundesbank in Frankfurt, but also upheld its tradition of putting a stable currency first.
All seemed well after the euro’s launch. Then the financial crisis erupted in 2008, starting in the United States and spreading like a virus to Europe, where Greece soon teetered on the edge of bankruptcy. Contrary to many Germans’ fears, the ECB’s austerity-led policies were probably too hard on southern Europe. While Germany was subject to the same monetary policy as before and did not have to change, the Mediterranean rim was used to softer currencies, higher inflation and most tellingly, periodic devaluations to maintain competitiveness. These countries had to adapt to the new regime in Frankfurt, but some failed to do so.
The Bundesbank slipped into an inconspicuous role after the euro was introduced; like other central banks in the currency bloc, it became a regional branch of the ECB or, more precisely, belonged to the “European System of Central Banks.” This body, presided over by the ECB, includes presidents of 19 central banks who partake in its joint decision-making.
The ECB’s monetary policy is implemented by the national branches, some of which still conduct their own economic and policy research. The United States has a similar system at the Federal Reserve, its central bank in Washington, D.C. Policy decisions are made at the main “Fed” in Washington, while 12 regional Feds perform practical tasks and conduct research while maintaining contact with businesses and the public.
The Bundesbank’s importance ebbed after the euro was rolled out, with anecdotes circulating about its officials not having enough work to do. Some Germans asked why their central bank was still needed. Although its activities became harder to fathom, this did not harm the bank’s image; on the contrary, the Bundesbank retained its mystique, drawing on a unique cocktail of prestige and impenetrability. Even today, the Bundesbank is a surprisingly large institution; staff numbers have dropped about one-third since the euro’s launch, but banking supervision, the institution’s second-largest department with 1,400 employees, was expanded after the financial crisis.
Central banks in other euro-zone countries such as Italy and Spain get by with a smaller staff, as does the Bank of England. But no job cuts are planned at the Bundesbank. In addition, while the bank likes to preach frugality, it owns lavish properties such as Hachenburg castle, a baroque palace that houses the bank’s university of applied sciences, and a heritage-protected villa by the Wannsee lake in Berlin.
The euro crisis came as an almost welcome challenge, giving Germany’s monetary watchdog a second lease on life. Yet Axel Weber, the Bundesbank’s boss at the time, threw in the towel: outnumbered by indebted euro-zone countries with soft-currency interests, he saw little chance of asserting a unified monetary policy.
Jens Weidmann (holding a gold bar in the photo below) became the latest president of the Bundesbank in 2011. Born in 1968, he is the bank’s youngest president to date. As head of the euro-zone’s most important national institution, he is prominent but still an outsider. Mr. Weidmann has regularly called for discipline in financial policy and warned against indirect state financing. As in the olden days of the deutsche mark, he’s keen on currency stability.
But if Mr. Weidmann hopes to succeed Mario Draghi as the ECB’s boss in 2019, he’ll need to adopt a pan-European vision. That also applies to the Bundesbank, which can still draw on its formidable reputation and research capacity to tackle Europe’s problems. After all, not all countries can be rescued by German-style governance.
It’s a tricky task. A recent survey by Open Europe, a think tank, shows the Bundesbank’s approval rating has dropped to 47 percent, partly due to the euro crisis. That’s still higher than ratings for the ECB (38 percent) and the European Parliament, but not much better than the German government.
From the ECB’s viewpoint, the Bundesbank likes to admonish others without suggesting viable alternatives. In 2012, for example, it was the only national bank to vote against the ECB’s decision to buy up unlimited amounts of bonds from euro-zone countries in an emergency. Yet the famed Bundesbankers failed to propose other solutions.
At meetings of the ECB’s governing council, conflict exists between different schools of thought and mentalities. Sources close to Mr. Weidmann report that he was initially surprised at how little was openly discussed within the council, which he said many members regarded more as a kind of supervisory board for approving decisions of the executive board. This gave the executive board tremendous power, he complained. This made it more important to seek talks outside official meetings, something that Mr. Weidmann does not appear to be doing. At this year’s annual ECB conference in Portugal, for example, not a single representative of the Bundesbank was on the guest list.
Like it or not, Germany plays a pivotal role in Europe, and the euro crisis forces it to take on more responsibility. The government and parliament in Berlin have made concessions, and tapped their own credit standing on the capital markets, to prevent the euro zone from crumbling on the fringes. Chancellor Angela Merkel and her finance minister, Wolfgang Schäuble, have done what was necessary, often torn between responsibility to Europe and their duties towards the electorate. They have relied on the cooperation of the ECB while still criticizing it publicly.
The Bundesbank has frequently participated in this criticism, but has seldom made realistic proposals as to what could be done differently. However, Germany’s central bank has a great deal of economic potential, and the high esteem that it still enjoys means it could retain considerable influence.
Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. Jeremy Gray is an editor with Handelsblatt Global. To contact the authors: firstname.lastname@example.org, email@example.com, firstname.lastname@example.org