A Love Affair with the Bundesbank

5th World Policy Conference in Cannes
Happily succumbed to the "ordoliberal" wiles of the Bundesbank. Source: DPA

Mario Monti, former EU Commissioner for Competition, makes no secret of his attachment to all things German. The respected economist, now president of Milan’s Bocconi University, enjoyed a close relationship to the Deutsche Bundesbank for decades and has intimate knowledge of its policy-making tools. In Italy, he is regarded as a champion of ironclad fiscal discipline.


Handelsblatt: Signor Monti, the Bundesbank is celebrating its 60th birthday. When did you and the bank first meet?

Mario Monti: I first met the Bundesbank when she was 15 and I was 29. The place was rather romantic – Lake Constance – though plagued by mosquitoes. I was attending a conference organized in 1972 by Karl Brunner of Konstanz University, where I first heard the Bundesbank’s views at a presentation by Horst Bockelmann.

Was it love at first sight?

Not really. I was quite shocked by the great simplicity, if not naiveté, of the Bundesbank’s analysis. But I was also impressed by how well the central bank helped forge a strong alliance with an inflation-averse public. That prompted me to study its policies more closely.

And what was the result?

Well, I then capitulated, although gradually, to the seductive charm of social market economics, not to mention ordoliberalism. It was there I started my genetic modification to become what some people called “the most German among Italian economists.”

What do you mean by the “great simplicity” of the Bundesbank?

The Bundesbank started operating with monetary targets along the lines of the Swiss central bank. It established a very simple link between money and prices. The Banca d’Italia, the Banque de France and others had much more sophisticated models for conducting monetary policy. And yet they were less successful in achieving low inflation.

Why was simplicity important?

Formulating monetary policy in a simple way gave the Bundesbank a stronger position, whenever there were calls from politicians or social partners for a more accommodating monetary policy that would have created inflation. It could simply say it had to stick to its operational targets. Besides the simplicity of the framework, another factor greatly helped the Bundesbank.

What factor was that?

The experience of hyperinflation between the two wars, with its tragic political consequences, made it easier to convince the public that it was valuable per se to have a low inflation rate. So the Bundesbank had strong political support. Even today, the chancellor can hardly afford any repeated public criticism by the Bundesbank president. In many other countries, the central bank governor may criticize government policies in public, without having a great impact on public opinion and policy-makers.

This strong alliance between the Bundesbank and the German public can also create problems. The Bundesbank has often criticized ECB policies, which might have led Germans to trust the ECB less. A recent Eurobarometer survey found 55 percent of Germans lack faith in the ECB.

Handling the relationship with public opinion and governments is obviously more difficult for the ECB in the euro zone, with 19 countries, than it was for any of the national central banks in their respective countries. The ECB president may face critical voices from representatives of countries with a strong aversion to inflation, and at the same time from others because they think he doesn’t do enough.

Should the Bundesbank explain the ECB’s policies better to the German public? 

Yes, I would expect that, while there can be disagreements on the board of the ECB, once a decision is reached with the required majority, every national central bank chief should explain, and loyally defend, that decision in his or her constituency. But I see this is not always the case.

So will it be impossible for the ECB to win great public support in all countries like the Bundesbank managed to do in Germany?

It is probably impossible at the moment. But one day, this may happen, after having really completed all the conditions for a genuine economic and monetary union, including labor mobility. Then there will be conditions more similar to those in the US.

German Chancellor Merkel talks with Italian Prime Minister Monti prior to a news conference at Villa Madama in Rome
During his stints in high office, Mr. Monti was considered a "safe pair of hands" by stability-minded German leaders. Source: Reuters

What is the most important next step for the monetary union?

I differ a bit from the official views held in France, Italy and Germany. Having a single finance minister or a common budget may be significant improvements. But for me, it is most urgent to overcome the gap in political cultures between northern and southern Europe. There lie, more than in institutional features, the deep roots of divergence and mutual mistrust.

Could you elaborate?

We must have some agreement on what is the essence of our being together – it is not that one fouls the others. If we continue to live in hypocrisy and mistrust, these are not the psychological and political conditions for a genuine monetary union – or indeed a successful European Union.

Which mistrust do you mean?

Take the Stability and Growth Pact. It is currently not really enforced. So there is disappointment in Germany and northern Europe because the rules are not respected, and there is disappointment in southern Europe because the rules, if strictly enforced, would prevent them achieving suitable economic growth in their view.

Germany and other northern European countries favor a rules-based system.

I totally understand that. But we need proper rules. And a proper rule is one that Germany’s own constitution has had for decades – before it was changed into the economically less-defensible Schuldenbremse [balanced budget amendment] – which allowed for government borrowing, but only as long as it was incurred to finance genuine government investment. In the case of the EU today, I favor that old German rule, complemented by a strict EU-level control of the eligibility of investments.

So should the Stability and Growth Pact be changed?

Before all the exceptions were built into the pact’s enforcement, no distinction was made between current government consumption and investment expenditure. I discussed this issue several times with my long-time friend, German finance minister Wolfgang Schäuble.

What did you say to Mr. Schäuble?

I said I fully shared his views on ordoliberalism, social market economics and fiscal discipline, all meant to protect future generations from current politicians. But when Germany – at a time when the federal government can borrow at 0.3 or 0.5 or 1 percent – refuses to run a modest deficit to finance more modern infrastructures, including cyberstructures, for future generations of Germans, I believe the government adheres more to formal orthodoxy than to the genuine interests of tomorrow’s Germans. More generally, with deep respect for what Germany has brought to Europe in terms of encouraging structural and long-term thinking, there is occasionally too much short-termism when German takes a position on EU policies.

What do you mean by “short-termism”?

Investment in the Stability Pact is one example where Germany’s unwillingness to accept a small deviation from what it – sometimes it alone – regards as orthodox purism has gradually caused, as the stability pact’s credibility evaporated, much larger unwanted deviations from German orthodoxy than would have been the case, had a slightly more pragmatic compromise been accepted in the first place. Another example, this time in monetary policy, concerns the OMT [Outright Monetary Transactions] program…

…through which the ECB can, under certain conditions, buy unlimited amounts of sovereign debt of specific euro-zone countries to counter panic in the markets.

At the height of the crisis in 2012, when I was prime minister of Italy, there was a vicious circle. For instance, although Italy quickly introduced a bold pension reform and other measures applauded by the EU and Germany, interest rates and spreads on Italian government bonds scarcely came down. Although the markets viewed the Italian measures positively, they were pricing in an increasing risk that the euro could fall apart, because of Greece and other tensions. So we had to act.


At the euro summit in June 2012, after long negotiations, we reached an unanimous agreement to do what was necessary for the financial stability of the euro area. This agreement paved the way, first for Mario Draghi’s statement in July that the ECB would do “whatever it takes” to preserve the euro, and later for the OMT program adopted by the ECB in September, mirroring the terms of the euro zone agreement. But the OMT program still had one important deficiency, which in my view was due to German short-termism.

Which deficiency?

Although the announcement of an OMT safety net helped to stabilize markets a lot, the OMT itself has never been activated. Why? I believe that has to do with the fact that, as soon as Chancellor Merkel signed the agreement like the rest of us, the people around her undermined it in one respect. They specified if a country applied for the OMT program, it would have to deal with the “troika” of the IMF, ECB and EU Commission, just like any country under the program. But no country eligible for the OMT, i.e. already complying with all EU recommendations, would have been willing to be saddled with the troika. Thus, the OMT has never been used.

USB called for a 24-hour general strike of all workers on 22 June
In his home country of Italy, the public didn't always agree with Mr. Monti's tough economic policies. Source: DPA

But the OMT program still really helped calm markets.

Exactly. Because it is a safety net. Even if no country applied for it, the markets were still comforted that it was there. That helped to avoid a euro crisis. But if I were a German, I would not be so happy with the “generosity” of the quantitative easing (QE) that came later. And we’re sure at least one German is unhappy – the Bundesbank’s president [Jens] Weidmann.

But Weidmann has been less critical about QE than he was about the OMT. He has stressed that QE is a legitimate tool of monetary policy, even though he was against it.

Then perhaps he is less German than he should be! Because the distinction should not be made if it’s in the tool box. In principle, Germany does not want anybody who isn’t trustworthy be financed. If access to the OMT had not been made so politically costly – because nobody wants the troika – my guess is that there would have been demand for OMT support, and therefore less overall need for QE.

So are you uncomfortable with QE?

Yes, because the kind of assets that the ECB buys on such a huge scale – from governments and corporates – may not always be of high quality. With the OMT, there would have been automatic preselection, as only government bonds of the countries complying with all the requirements would have been purchased. Monetary accommodation would have occurred with smaller negative consequences, both in terms of reducing incentives for sound government policies, and of worsening the quality of ECB assets.

Should the ECB stop QE?

I am not so much into financial markets anymore, so I cannot say so much about the timing. But it would clearly be a good sign, because I think QE should only be reserved for exceptional circumstances.

You are described as the most German among Italian economists. Do you think Mr. Weidmann would be a suitable candidate for the presidency of ECB?

I never make pronouncements about candidates for public office.

Let’s put it this way: If there would be a German president of ECB in future, would the bank become more like the Bundesbank?

If we want Europe to make real progress, we need to reach the point where policy conducted by different EU policymakers is really unrelated to their country of origin.

But often, central bank governors from northern countries favor a tighter monetary policy and governors from southern Europe the opposite. So it never really works.

But there is a difference between the president and a member of the governing board from a particular country. I would expect, and require, that the president’s policy stance is unrelated to his or her country.

Let’s come back to your love affair with the Bundesbank. Has it survived since the days at Lake Constance?

I think it’s not over and it’s going to last. First of all, the Bundesbank still exists and I have excellent relations with it and its president. Secondly, there is the ECB and of course I expect it to remain part of the European landscape. To me, the ECB in its structure, in its institution and its inspiration, is rooted in the Bundesbank’s history and tradition. I would suggest the Bundesbank remain the anchor of long-termism for the EU.

What is your vision for the future?

If we look not five or 10 years ahead, but 60 years from now, then I would wish the Bundesbank no longer existed. I am saying this with the greatest admiration. By then, we’ll either have a real central bank for the [European] currency area, or we’ll have the Bundesbank and the other national central banks with all their functions. Maybe in some moments of nostalgia, people might long for the latter, but that would be a signal that the European project has ended.


Regina Krieger is Handelsblatt’s Italy correspondent. To contact the author:

We hope you enjoyed this article

Make sure to sign up for our free newsletters too!