A Comprehensive Interview with the ECB Dissenter

Jens Weidmann, president of the German Bundesbank, is well-known for his disdain of the ECB’s unconventional policy measures. He continues to believe that the way forward does not require ever looser monetary policy, but economic reform. On these points we tend to agree with him; however, just as other central bankers, he of course supports the nonsensical ECB “price stability target”.

Needless to say, if the money issued by the central bank were to lose 2% of its purchasing power every year as planned, we would say that this would not represent price stability by any stretch of the imagination. However, we are actually not really critical of the precise “target” of the policy, but of the entire concept as such. It is a dangerous concept even if it were to target 0% price inflation. It has produced untold mischief over the past century, mainly in the form of major booms and busts (we have detailed the problems in “The Errors and Dangers of the Price Stability Policy”).

Anyway, Weidmann has recently given an interview to German news magazine Der Spiegel, which is well worth reading in its entirety. Weidmann evidently does not trust the calm in the financial markets and definitely does not believe that the euro area crisis is over and done with just because sovereign bond yields have declined a lot. Below are excerpts containing the parts we found most interesting:

“SPIEGEL: Mr. Weidmann, you are notorious for being a tough critic of European Central Bank President Mario Draghi. But the euro crisis seems to be over, largely thanks to ECB intervention. Has he not been proven right?

Weidmann: It’s not about being right or a personal confrontation. When it comes to extremely important monetary policy decisions, the ECB Governing Council does its utmost to find the correct path. And the decisions are so difficult because the crisis is not yet behind us, even if the current calm on the financial markets might suggest as much.

SPIEGEL: Yet Spain, once wracked by the euro-zone crisis, can today borrow money more cheaply than ever before in the history of the monetary union. Do you not think that is a consequence of Mario Draghi’s 2012 pledge to save the euro “whatever it takes”?

Weidmann:You shouldn’t mistake the thermometer for the illness. I have never disputed that the ECB could impress and move the markets with the announcement that it would make massive purchases of sovereign bonds if necessary. But such measures focus on the symptoms and don’t cure the causes of the crisis. As such, the current calm is misleading and even dangerous, because it takes pressure off of the governments to implement badly needed reforms. If they are not undertaken, investors could quickly change their risk evaluations.

SPIEGEL: But if the ECB hadn’t intervened, the euro zone patient may well have died from its 2012 fever.

Weidmann: I don’t believe that is the case. In reaction to the crisis, policymakers established a multibillion euro bailout fund to assist the crisis countries in exchange for their adherence to certain stipulations. That was the correct, democratically legitimate path. Even more so given that the bailout fund can also purchase sovereign bonds. The central bank in the euro zone, by contrast, is forbidden from providing credit to countries and from purchasing sovereign bonds on the primary market. By making targeted bond purchases on the secondary market, the ECB opened itself to accusations of skirting this ban.

SPIEGEL: Since the beginning of the financial crisis, the European Central Bank has injected liquidity into the markets at decreasing intervals. It is a bit reminiscent of a junkie who has to continually up the dosage to have the desired effect.

Weidmann:It is certainly true that after each loosening of monetary policy, the public immediately begins speculating about what might come next.

An example of one of these “thermometers” can be seen below:

10-year government bond yield of Spain – yes, the ECB has managed to impress the markets. Note though that Spain’s government has made far better progress in terms of economic reform than those of many other euro area countries. The next phase of the crisis is more likely to involve countries the governments of which have failed to introduce meaningful reform – click to enlarge.

The “Misunderstood” Noyer

Although Mr. Weidmann defends both the ECB’s recent actions (while once again voicing his opposition to sovereign bond purchases) and its price stability target – the latter on the grounds that central bank intervention can be “more effective” if prices are mildly rising and rates are therefore not near zero – he isn’t greatly worried about “deflation dangers”:

“SPIEGEL: How realistic is the danger of deflation in the euro zone?

Weidmann: The probability of a problematic deflationary development is very low. The decline of the inflation rate is largely due to sinking energy and commodity prices. As a central bank, we don’t have any direct influence on that and the effects on the inflation rate are only temporary insofar as, for example, companies and trade unions don’t react with their wage agreements. In addition, adjustment processes in the crisis countries are behind the development. During the adjustment period, not only economic growth, but also price pressures will be dulled.Rapidly overcoming this phase is another reason structural reforms must be resolutely implemented.”

In fact, the crisis countries actually need falling nominal prices and wages, as they are out of step with those in the rest of the euro area. This process is being undermined by the ECB’s policies, even though Weidmann fails to mention that. Finally, in his painstaking efforts not to step on the toes of his fellow European central bankers, Weidmann makes the following hilarious remark:

“SPIEGEL: Christian Noyer, head of the French central bank, said that the new measures are also aimed at pushing down the euro exchange rate. Is that the task of the ECB?

Weidmann:  Absolutely not, and I believe that Christian Noyer was misunderstood.”

Not even nearby horses were able to keep their customary cool upon hearing that …

(Photo via imgace.com)

Mr. Noyer was of course definitely not “misunderstood”. In fact, Weidmann seems to be considering that possibility, as he sees fit to add the following by way of explanation (presumably directed at Noyer, in case he actually meant what he said):

“Policies aimed at intentionally weakening one’s own currency would also not be consistent with G-20 agreements. More than anything, a weak currency is not a good way to ensure lasting growth.”

He has definitely got that right, and perhaps somebody should mail the interview to Mr. Kuroda in Tokyo as well. Just saying.

Building Bridges to Nowhere Gets You – Nowhere!

Here are several more interesting tidbits from the Weidmann interview:

“SPIEGEL: You are seen as the great doubter while Draghi is celebrated as Europe’s savior. Does that bother you?

Weidmann: Such generalizations miss the point and are not helpful. Mario Draghi has also repeatedly pointed out that monetary policy alone isn’t enough to save Europe. I am convinced that a central bank that allows itself to be pressured by politics risks its independence. If a central bank compensates for a lack of political action, the pressure to do so over and over again will constantly increase and it runs the risk of losing sight of its price stability targets.

SPIEGEL: Supporters of this course of action say that the ECB has to do something because politicians are abdicating their responsibility for finding a solution. Are they not right?

Weidmann: The view of democracy that informs this question is not one that I share. If elected politicians don’t take action for fear of voter dissatisfaction then a small circle of central bankers, who are not elected and who don’t have a mandate for economic policy, should not allow themselves to be seduced into taking on the role of policymakers. Such a procedure is not a sound foundation for the collective European house.

[…]

SPIEGEL: [...]Is there not a danger of strangling the economy via austerity?

Weidmann: We are far away from that. In some countries, the deficits have been over 3 percent for years and this year too will see six euro-zone countries transgress the deficit limit. The danger I see is that the necessary budget consolidations will be delayed and that the trust that has been lost won’t be built up again quickly enough. Solid budgets, furthermore, are a precondition for, not a contradiction to, sustainable economic growth.

[…]

SPIEGEL: What is your recipe for increased growth?

Weidmann: Growth and jobs are ultimately produced by private companies. That is where investment must take place. To promote that, the public sphere must create the necessary framework.

I believe that the improvement of administration structures in many crisis countries, for example, is much more important than reflexively demanding that new streets and bridges be built. If you have to wait months for an operating or construction license, that doesn’t promote the willingness to become active as an entrepreneur. In addition, public budgets must be consolidated, labor markets must be made more flexible and banks must be stabilized as promised so that loans can once again be made. And there has been progress on those issues.”

Apart from repetition about the alleged usefulness of the price stability target, most of this deserves a hearty “Amen, brother”.

The ECB’s planned asset purchases – Mr. Weidmann dissented when the ECB decided on those.

PS:

The title of this post is a word play on the German term ‘Waidmann”, an archaic word for “hunter” (which sounds exactly like “Weidmann”). Huntsmen traditionally wish each other luck for the hunt by saying “Waidmann’s Heil”.

Charts by: BigCharts, Der Spiegel