Banker's beef Between Principles and Pragmatism

Bundesbank President Jens Weidmann spoke with Handelsblatt publisher Gabor Steingart about the European Central Bank, low interest rates, government bond purchases, and beer.
Gabor Steingart and Jens Weidmann have plenty to talk about.

For many years now, Germans have suffered from historically low interest rates that have reduced the purchasing power of their savings. While much of the struggling euro zone is still looking to the European Central Bank for additional help to revive their economies, Germans are keen to know when interest rates might finally go up.

Jens Weidmann, president of Germany's central bank, the Bundesbank, offered little hope of such a shift in an exchange of views with Handelsblatt publisher Gabor Steingart at the "People in Europe" event hosted by the Passau Publishing Group.

Citing the Bundesbank's projections that the euro zone's inflation rate will likely remain significantly below the ECB's targeted rate of 2 percent, Mr. Weidmann said the current situation was "not exactly the right ingredient for a reversal in the monetary policy course."

One attendee questioned how Germans can be expected to save enough money to last through retirement, given the low interest-rate environment. Mr. Weidmann offered no specific investment tips but some general advice: Buy only what you understand and be wary of promises of high returns.

You need to be aware that a higher interest rate comes with higher risk. Jens Weidmann, Bundesbank President

"You need to be aware that a higher interest rate comes with higher risk," Mr. Weidmann warned.

He noted that Germans, on average, are still achieving positive interest returns on their overall assets, thanks in part to stock holdings that have still been rising at a faster clip. There is no reason to fear inflation or deflation, he added.

Those remarks, however, come amid growing criticism of the European Central Bank, which reduced its benchmark interest rate in September to a record low of 0.05 percent and is in the process of adding additional billions of euro to the financial system through cash infusions for banks and the purchase of covered bonds and asset-backed securities.

Under the leadership of president Mario Draghi, the ECB is also considering further steps to revive the euro zone economy, including the controversial purchase of government bonds. The Bundesbank and its president are critical of the plan, and reports suggest they are not alone among the euro zone's national central bank members in questioning Mr. Draghi's course.

"Substantial disincentives would be associated with the purchase of government bonds," Mr. Weidmann said, noting that the euro zone crisis showed what happens when the principle of individual responsibility is violated over a longer period of time. In the end, he added, making countries more responsible for their actions results in a better economic policy that tackles the causes of problems rather than just fixing the symptoms.

The ECB has a huge amount of power to influence the course of the euro zone economy but that doesn't mean it should always use this power. For Mr. Weidmann, this was demonstrated by some of the first measures taken by the ECB soon after the euro zone crisis began in 2009. Back then, the ECB bought up government bonds from struggling euro zone members. At the time, the markets were questioning whether some of these countries in southern Europe would be able to service their debt. The ECB intervened, and it was successful, at least at first glance.

The economic situation isn't good enough for Europeans to begin discussing how to cut back the aid programs

"It was successful because rates went down in the market. But this was never up for debate," Mr. Weidmann said. "We are a player that has relatively deep pockets. We print the currency that is used to relieve debts, and so of course we can buy quite a lot with that. That's why I felt the effect on the financial markets was never a gauge for the success of this program."

But while Mr. Weidmann opposes plans to purchase the government bonds of all euro zone members, he does believe that additional support measures for the economy are absolutely appropriate.

"Against the background of a cautious price outlook and the weak economy in the euro zone, an expansive monetary policy is fundamentally appropriate, and it also makes sense that the ECB Council has discussed and continues to discuss additional measures at length," Mr. Weidmann said.

The economic situation, he argued, isn't good enough for Europeans to begin discussing how to cut back the emergency aid provided by central banks, even if the situation in the financial markets has settled down since the height of the euro zone's debt crisis. The market reaction shouldn’t be the only gauge for the ECB, Mr. Weidmann warned.

A real-life example: What if the Bundesbank decided to buy up beer produced in Passau at €20, or $25, a liter? The market price of beer would naturally plateau at that level – and yet that would "not necessarily be proof of a smart monetary policy." In the end, he said, only businesses can create the kind of sustainable growth that has a positive impact on prosperity and jobs.

German policymakers are paying too much attention to the problems of their neighbors.

Mr. Weidmann said he saw evidence of "robust growth" in Germany, both this year and in 2015 – a view not fully shared by Mr. Steingart, who noted that growth would be significantly weaker this year than the Bundesbank had anticipated. The central bank, he said, predicted about 2 percent growth in early 2014, but real growth ended up being only half as strong.

Mr. Weidmann was critical of the situation in Germany. Policymakers in Berlin are paying too much attention to the problems of their neighbors, while ignoring challenges in their own backyard, such as the aging population, he warned. If anything, Mr. Weidmann said lawmakers have tended to exacerbate the problem with recent decisions to improve social policies.

Mr. Weidmann has steadfastly backed the Berlin government on one thing - the need to keep government spending in check. The Bundesbank president rejected calls to stimulate growth in Europe, especially through programs that are paid for with new debt.

He did however approved of countries generally investing more money in infrastructure. That, said Mr. Steingart, was a conciliatory gesture from “a man caught between principles and pragmatism,” given the pressure coming from Paris, Brussels and Washington to spend more taxpayer money to stimulate the economy.


Kerstin Leitel covers banks and insurance companies from Handelsblatt's Munich bureau. To contact the author: [email protected]