Jens Weidmann may have been happy he wasn’t in charge of Europe on Wednesday.
As thousands of protesters battled police outside Mario Draghi’s European Central Bank headquarters in Frankfurt, setting fire to police cars and shouting anti-capitalist slogans, Mr. Weidmann’s office on the outskirts of the city escaped the chaos mostly untouched.
Once upon a time Mr. Weidmann’s Bundesbank, Germany’s central bank, would have been the target of the protests. Located in an imposing, drab, concrete 1950s-era building, the Bundesbank’s headquarters sits about six kilometers (3.7 miles) from the ECB’s spanking new twin-glass towers.
The Bundesbank has seemingly been sidelined. Mr. Weidmann, its current president, a post that makes him one of the standard-bearers of German economic thought, has been repeatedly outvoted by the ECB’s 25-member governing council – decisions he thinks are putting the euro zone at risk.
But any suggestion that the Bundesbank no longer has influence over monetary policy in Europe is “much too short-sighted,” said Otmar Issing, a former Bundesbank board member and the ECB’s first chief economist, in an interview with the Handelsblatt Global Edition. He’s now a finance professor in Frankfurt. “The impact can’t simply be measured by how the majorities are currently falling.”
“The launch of QE probably came later than it would have done had it not been for the Bundesbank.”
Many have written the Bundesbank’s obituary over the years. Once the center of monetary policy in Europe, and a model for the Frankfurt-based ECB itself, the German central bank has struggled to define its new role since the euro currency took over from the deutsche mark in 1999.
With the euro, “every national central bank became much less powerful, and this reduction was by far the biggest for the Bundesbank, because it had played an anchor role before,” said Volker Wieland, a German government economic advisor and head of monetary policy research at Goethe University in Frankfurt, where Mr. Issing heads the finance department. “Now it’s just one of the team.”
Now, with the ECB starting to buy government bonds on a grand scale – €1.14 trillion between now and September 2016 – talk of Germany’s declining role in European monetary policy has reached a fever pitch once again.
But even if Mr. Weidmann may have been outvoted on quantitative easing, which he publicly opposed, observers agree he had a major impact on the debate – both on the timing and structure of the program that Mario Draghi first announced in January and launched just last week.
“The launch of QE probably came later than it would have done had it not been for the Bundesbank,” Erik Nielsen, chief economist of the Italian bank Unicredit, said in an interview.
Mr. Nielsen and others also credit Mr. Weidmann for helping shape the program by insisting that the risks of buying government bonds be kept within individual countries where the bonds are bought. In other words, Greece is liable for buying Greek bonds, and the Bundesbank for German debt.
It is a demand that may have helped Mr. Draghi secure the majority he needed to pass the unprecedented bond buying program by convincing reluctant council members to sign on.
Although he struggles with whether ring fencing the risks of bond buying was a good idea, “politically it was probably a very clever move,” Mr. Nielson said.
The constructive contribution of the Bundesbank marks a change in tenor from the turf wars that marked the first five years of the crisis.
Relations had deteriorated as the European Central Bank grew more aggressive in its efforts to rescue the euro from collapse, setting up a monetary backstop to prop up southern Europe.
The activist course was a marked shift in policy, which the Bundesbank and Mr. Weidmann considered an illegal overstepping of the ECB’s mandate. The power struggle between austerity-driven Bundesbank and the more U.S.-U.K. guided remedies adopted by the ECB led to the resignation of two German central bankers from the ECB’s council, Jürgen Stark and Axel Weber.
It never used to be this contentious. But then, the problems in the euro area, and the threat of a break-up of the 19-nation currency bloc, which now stretches from Dublin to Riga, Latvia, had never before been this serious.
Mr. Issing, who played an influential role in guiding ECB monetary policy in the bank’s early years, said things changed once the ECB began buying the bonds of countries in the euro zone in 2010. In essence, the bank crossed a rubicon of sorts – one that German thinkers had always held sacred.
“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,” said Mr. Issing, a member of the ECB’s executive board from 1998 to 2006. “This fundamental understanding fell apart the moment that monetary policy considered and decided measures that were aimed at individual countries.”
The bank’s character had changed, in a way becoming less German, and more southern European.
“Since then, a whole range of measures have been taken by the ECB that are attempting to steer liquidity directly to individual countries,” Mr. Issing said. “These are all orientations of a national character that hadn’t existed before…only since then has the Bundesbank’s influence even been a topic of discussion.”
What makes this all the more awkward is that Germany’s central bank, like all 19 national central banks in the euro, is charged with upholding and implementing ECB policies – even those it firmly rejects. The ECB sets course, the Bundesbank carries out the orders, that’s how it’s supposed to work.
This also applies to Mr. Draghi’s €1.14 trillion quantitative easing plan, which was portrayed in the German media as the equivalent of a massive incineration of domestic wealth.
Under the bond buying plan, the Bundesbank will actually buy up about one quarter of the total amount in the program, more than any other national central bank over the next year.
As if to add insult to injury, the Bundesbank will likely lose money on some bonds it buys. Yields are currently negative for any German bond with a maturity of seven years or less.
Mr. Weidmann laughed when asked at the bank’s annual press conference last week whether he personally pushed the button to start buying German bonds. He admitted he wasn’t even in town for the big launch of quantitative easing on March 9.
“We left it to our experts,” he said.
In carrying out the program, the Bundesbank has actually taken a more moderate and pragmatic approach to QE than some arch-conservative economists and politicians in Germany would have liked.
Hans Michelbach, a leading parliamentarian from the Christian Social Union, the Bavarian sister party to Chancellor Angela Merkel’s Christian Democrats, had urged the Bundesbank to boycott the QE program.
Hans-Werner Sinn, the head of the Munich-based Ifo Institute and a leading conservative voice in Germany, has called the bond-buying program “illegal and unsolid state financing.”
Mr. Weidmann for his part has repeatedly acknowledged that the program is a valid part of any central bank’s toolkit. Like many German economists, he just doesn’t see a need for it.
“It’s a normal instrument of monetary policy to buy assets, and looking at Jens Weidmann’s speeches I think he thinks that too. He just says there are certain risks coming with it, and that those risks are more pronounced in a union made out of more or less fiscally-sovereign countries,” Mr. Wieland said.
Mr. Weidmann has shown that Germany, despite its differences, is committed to the euro, he added.
“He’s presented his position well and I share it mostly,” Mr. Wieland added. “That is the role the Bundesbank, like any other national central bank in the Eurosystem, is supposed to play.”
It is a nuance that has often escaped the financial markets in the past.
When Mr. Weidmann first suggested last year that quantitative easing was possible “in principle,” it was seen as a shift in policy after years of opposing the ECB’s plans to buy individual country bonds.
Mr. Issing noted it was nothing of the kind – he himself raised the possibility of quantitative easing more than 10 years ago. The difference is a matter of law: the Bundesbank saw buying the bonds of a single country as illegal under the ECB charter, while buying bonds of all countries is valid.
Jacob Funk Kirkegaard, a senior fellow at the Washington-based Peterson Institute, noted that this constructive approach is where the ECB differs from monetary-policy making in the U.S. central bank, the Federal Reserve, where opponents of a program have had little say in policy making.
“The design options available to the Fed are actually quite limited compared to the ECB and therefore the influence of the hawks on how it is done is quite limited,” he said. In other words, the Bundesbank and its backers “clearly had a greater influence over QE than the hawks had on the Federal Reserve.”
For Mr. Issing and others, the Bundesbank is now playing the long game. Only time will tell just how much of an impact the Bundesbank may have had – and which institution will be proved right in the long run. “The jury is still out when it comes to the current measures,” he said.
Mr. Weidmann has said the risks are greater than the reward. Only time will tell if he’s right.
Christopher Cermak has covered monetary policy in Washington and Frankfurt. He is now an editor for the Handelsblatt Global Edition in Berlin, where he covers finance and the economy. To contact the author: email@example.com