The resignation of Bundesbank President Jens Weidmann almost six years before his contract expires shows one thing very clearly: the old fundamental conflicts over the monetary policy of the European Central Bank (ECB) are breaking out again. The attempt by ECB President Christine Lagarde to intercept the confrontation ultimately failed. The cohesion was due to hardship during the corona pandemic. This attempt failed before the emergency ended.
Weidmann goes at a central point in time. Because it is up to the decision what kind of central bank the ECB wants to be in the long run. The question is whether it will continue its extremely flexible monetary policy after the pandemic or return to old regulatory principles.
Jens Weidmann stands for the latter like no other – and he’s right. After the Covid crisis, the ECB has to pay more attention to its principles, which aim at a clear separation of monetary and financial policy. And no matter who follows Jens Weidmann at the top of the Bundesbank, you have to stand up for this course.
In order to maintain its strong influence on monetary policy in the euro area, the Bundesbank must also readjust its relationship with the ECB. The Bundesbank should become more pragmatic. Insisting on principles that are actually supposed to ensure stability can also endanger stability in exceptional times of crisis. If the euro area threatens to break up, the central bank, which is responsible for the euro, cannot simply watch. The Bundesbank was not always helpful at such moments.
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Both are important in monetary policy: above all, pragmatism helps to contain crises quickly, while principles are important in order to avoid crises. The problem in the Governing Council is that many representatives there stand for either one or the other. What is correct, however, depends on the circumstances.
In the pandemic, many euro countries would have got into major problems through no fault of their own without the help of the ECB. It was right here to act quickly, because otherwise the economic crisis would have had an even stronger momentum of its own. The ECB prevented this with its extremely flexible bond purchases. That was right.
Risk of obscuring the price mandate
Now, however, there is a risk that the pandemic will serve as a pretext for the ECB to permanently undermine the previously applicable principles of the ECB. That would be fatal, especially at a time of higher inflation, when governments and central banks often have very conflicting interests. Some representatives are already calling for the flexibility introduced in the pandemic to be maintained at least partially in the future. But that would mean that pragmatism would obscure the ECB’s clear mandate to ensure price stability.
The President of the Bundesbank terminated his contract six years before the end of his contract.
(Photo: dpa)
In addition, it is a matter of limiting the already great influence of the central banks on the markets and politics and thus also protecting their independence. To this end, the ECB should again leave the yield spreads between the euro countries more to the markets so that their steering function is retained. The ECB must not become the vicarious agent of governments.
The Bundesbank should insist on good principles, but sometimes also show more understanding for the problems of other euro countries. One candidate who could be trusted to do so is the previous ECB director Isabel Schnabel. The former finance professor in Bonn is technically beyond doubt. It cannot easily be assigned to a specific monetary policy camp. Most recently, for example, she warned more of the dangers of inflation and during her time on the Council of Economic Experts also criticized the ECB’s policy.
On the other hand, she has repeatedly defended the ECB’s policy. Critics therefore accuse her that it is not clear what she stands for. There are good reasons for their approach, however, because monetary policy relationships are not static. They depend a lot on the particular situation. Therefore, too clear a definition is often a hindrance. Schnabel could also improve Germans’ confidence in the ECB.
During his ten-year tenure at the Bundesbank, Jens Weidmann has earned respect internally and externally as a regulatory conscience in the euro area. His critics also value his expertise as a monetary politician and economist. Many in Germany saw it as a guarantee that the stability-oriented tradition of the Bundesbank would also be preserved for the euro.
Whoever follows him should stand up for these principles, but also advocate pragmatism in times of crisis. Because both are only apparently a contradiction.
More: Bundesbank President Weidmann resigns – several candidates for successor