Issing Interview

The ECB and the End of Unity

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Otmar Issing sees deflation risk.
  • Why it matters

    Why it matters

    Otmar Issing argues many European central bankers have reverted back to a national mindset since the euro zone crisis – a destructive tendency for a central bank that should be setting policy for the euro zone as a whole.

  • Facts

    Facts

    • Otmar Issing spent eight years as a board member of Germany’s central bank, the Bundesbank, before becoming the European Central Bank’s first ever chief economist in 1998.
    • Mr. Issing stepped down from the ECB in 2006 and has been president of the Center for Financial Studies at Frankfurt’s Goethe University ever since.
    • Among other things, Mr. Issing is credited with first proposing the ECB adopt an inflation target of “below 2 percent,”  a target that was revised in 2003 to “close to but below 2 percent.”
  • Audio

    Audio

  • Pdf

Otmar Issing is credited with a lot of things. Most importantly, the German central banker steered the European Central Bank’s monetary policy in its early uncertain years, ushering in a brand new global currency, the euro. As the Frankfurt-based ECB’s chief economist from 1998 to 2006, Mr. Issing’s recommendations on interest rates went essentially unchallenged. Now, he says, everything has changed. The euro zone debt crisis – and the ECB’s role in solving it – has broken the unity the central bank once had. The Bundesbank, once the mold for the ECB itself, is struggling for relevance. Mr. Issing insists the German central bank can still play a constructive role.

Handelsblatt Global Edition: Mr. Issing, what exactly is the monetary policy role of the Bundesbank in the European Central Bank these days?

Otmar Issing: The Bundesbank president, like any other national central bank governor, has one vote on the ECB’s governing council. Ahead of the Maastricht treaty creating the euro, there were fierce discussions over whether “one person, one vote” was the right way forward. The skeptics were eventually convinced that weighting national votes would have gone against the idea of a common currency. The governors don’t sit in the ECB council as members of their countries but as independent individuals, who are called on to lead a single monetary policy that fits the entire euro zone.

And now, the ECB has introduced a rotation principle that will see the Bundesbank lose its voting rights some months out of the year. This has caused some concern in Germany.

I think all of this distracts from the main point, which is that the monetary policy decisions shouldn’t be about national interests but about the right monetary policy for the entire euro zone. That was the philosophy that the ECB council strictly followed in its first years.

What has changed since those early years? Why does there seem to be less consensus in the governing council today?

During my time in the executive, after some early growing pains, it became completely clear that national interests would not intrude. No member of the council would at that time have spoken out in favor of a different monetary policy for national reasons.

This situation changed fundamentally in 2010. At that time, the ECB decided to buy the government bonds of individual countries. That was something that had never before been pending or even considered, and which had basically been ruled out in principle.

Since then, a whole range of measures have been taken by the ECB that are attempting to steer liquidity directly to individual countries. These are all orientations of a national character that hadn’t existed before – that there hadn’t been a need for before. Here, national elements have really come into play, and made the expression of national interests on the governing council really unavoidable.

Has this revival of national interests forced the Bundesbank into a corner?

That’s much too short-sighted. Even if one is occasionally out-voted, this doesn’t by any means imply that important arguments, convictions, presentations haven’t been presented to the council, which may influence the thought processes and even leave their impression on those members that “voted against the Bundesbank.”

 

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The days when Otmar Issing was in charge. Source: Reuters

 

Has the Bundesbank and its president, Jens Weidmann, had an impact on the more recent discussions over additional monetary policy measures?

The jury is still out when it comes to the current measures. At the moment, there are differences in opinion over the likely effectiveness and initial impact of the different programs. That means the concerns that the Bundesbank has expressed are far from invalid just because the majority voted the other way. There are certainly also ECB members who are close to Mr. Weidmann’s point of view who decided for whatever reason to follow the majority for the moment.

The Bundesbank is by no means ineffective, and by no means without influence. The voice of the Bundesbank can also see to it that “something worse” is avoided.

Did you have debates over the Bundesbank’s philosophy in your time?

When I was at the ECB, there was an overwhelming, fundamental understanding of what needed to be done. For that reason, the influence of the Bundesbank wasn’t even a topic of discussion. It was unanimous. Monetary policy was after all considered for the most part, also because of my role, as a continuation of the Bundesbank’s philosophy for the euro area.

This fundamental understanding fell apart the moment that monetary policy considered and decided measures that were aimed at individual countries. This is what has changed since 2010, and only since then has the Bundesbank’s influence even been a topic of discussion.

Does quantitative easing mark a departure from the philosophy of the ECB, like the post-2010 measures you mentioned? Were you surprised that Mr. Weidmann acknowledged QE was a legal part of the ECB’s toolkit?

It is not a fundamental change in the philosophy of the ECB. Ten years ago, when I appeared before the European Parliament to explain our policies, I was often criticized for having one eye closed – I saw only inflation dangers, and didn’t see deflationary dangers. I told them then, I have both eyes open, but I just don’t see any signs of deflationary threats.

The next argument that came would be, ‘but if there was such a danger, would the ECB even have any tools to fight deflation?’ I already said back then that the ECB could, like any other central bank in the world, buy all kinds of assets on the open market, even government bonds, if deemed necessary for monetary policy reasons. This is completely clear.

Now, the question is, firstly, is there a real danger of deflation? And second, how do I carry out an open-market policy in such a way that it does not constitute monetary financing. This is forbidden after all. In that sense, what Mr. Weidmann has said is perfectly consistent, not just with what I said 10 years ago, but with what is naturally the expectation of a fully-functioning central bank.

Has the ECB taken these legal considerations into account in the design of its QE program?

Here, the Bundesbank’s warnings that the prohibition of monetary financing must be upheld certainly helped considerably. This likely led to the program being designed in such a way that the legal aspects were taken into account.

In your time at the ECB, the central bank set a goal of keeping inflation close to but below 2 percent over the medium term. Some in Germany are asking whether this goal makes sense anymore.

The “below 2 percent” goal was defined by the ECB for strategic purposes. It is not a mandate. The mandate is simply to ensure price stability. There can always be reasons to reconsider earlier decisions – one can discuss whether this is still a reasonable goal or not. Some have suggested raising it to 4 percent; others say we should lower the goal because we live in entirely different times. You can argue over this for a long time.

Another possibility would be to say that “medium term” is a flexible term. In the past, I was always asked by the European Parliament, “what exactly does medium term mean”? I always refused at the time, and said I couldn’t give a quantitative definition. So it was never exactly defined, and I don’t really think it can be exactly defined. That means one can also think about extending the time horizon for when the 2-percent target should be reached.

Mr. Issing, thank you for the interview.

 

Christopher Cermak is an editor with the Handelsblatt Global Edition in Berlin, covering economics, finance and monetary policy. To contact the author: cermak@handelsblatt.com 

 

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