In a country wary of patriotism, Germany’s central bank is one of the few institutions that inspire pride. Other European politicians could only wonder at just how attached people were to the Bundesbank. In 1992 the European Commission president Jacques Delors said with only a touch of sarcasm that “Not all Germans believe in God, but everyone believes in Bundesbank.”
With the bank turning 60 this August, the Bundesbank is opening its doors to its adoring public for a special celebration this weekend. Visitors will be able to touch gold bars and use a surf simulator to demonstrate how hard it is to balance interest rates. There will also be an XXL Carrera race track to illustrate how payment transactions work.
But the festivities won’t conceal the fact that the times have changed: 18 years after the introduction of the common European currency, the euro, it is still struggling to properly settle into a role that draws on its former greatness but also makes it a cooperative part of the euro zone. In particular, its president, Jens Weidmann, has been a vocal critic of the European Central Bank’s monetary policy.
The Bundesbank is under a strange kind of pressure. Today it is just one of many national offshoots within the ECB system. Although it has a vote in the ECB and represents Europe’s largest economy, it cannot independently shape monetary policy any more than the regional branches of the American central bank, the Federal Reserve.
“The Bundesbank doesn't exist any more. It's time to recognize that.”
“The Bundesbank has to master a tightrope act,” said Jörg Krämer, chief economist at German bank Commerzbank. “On one hand, it must remain true to its convictions on monetary policy, to make sure it doesn’t lose the trust of the Germans. At the same time, it mustn’t go off into a corner and sulk on the ECB Governing Council, or it will lose the influence it still has.”
There are divisions both within and outside the ECB over the Bundesbank’s role, and just how independent it truly is from Berlin. German central bankers tend to see the Bundesbank as representing an important conservative school of economic thought and bravely driving back the influence of economically weaker euro-zone countries that benefit from a soft monetary policy. Critics suggest the German government, with the Bundesbank’s support, will only insist on the independence of monetary policy as long as it is in the interests of German savers. If it believes their interests are at risk, it will blithely intervene.
Adam Posen, a former British central banker, argues that Mr. Weidmann’s repeated attacks have actually “undermined” the ECB’s independence by calling its credibility into question. The Bundesbank has an inflated sense of its own importance, Mr. Posen told Handelsblatt, given that it is now only one of 19 national institutions responsible for monetary policy in the euro zone. Willem Buiter, chief economist at US bank Citigroup, goes even further: “The Bundesbank doesn’t exist any more,” he said. “It’s time to recognize that. Close it. Cross its name out. It lost its substance with the introduction of the euro.”
The Bundesbank’s balancing act could become even more difficult over the next few years, depending on who replaces ECB President Mario Draghi in 2019. Early talks have already begun, and Mr. Weidmann is thought to be one of the candidates.
It’s possible that Mr. Weidmann could meet a similar fate to Mr. Draghi, but in reverse. Mr. Draghi has led the ECB into a phase of very loose monetary policy, as has happened at other central banks around the world. In doing so, he has often been accused of serving the interests of his own country, Italy. Mr. Weidmann would probably replace him in a phase of tighter monetary policy at the ECB in the wake of other central banks like the Fed. This could give rise to allegations that he is representing German interests.
It should also be pointed out that in the 18 years prior to the introduction of the euro, German inflation was at 2.6 percent. In the 18 years since then, it has stood at only 1.4 percent. The ECB is thus doing no worse than the Bundesbank when it comes to controlling inflation – the task most Germans want a central bank to perform best.
Jan Mallien covers monetary policy for Handelsblatt out of Frankfurt. Frank Wiebe is a New York correspondent for Handelsblatt, covering finance policy. To contact the authors: firstname.lastname@example.org and email@example.com.