After 10 years of fighting the windmills of lose monetary policy, Bundesbank president Jens Weidmann leaves the stage. There are two reactions in Germany (and across Europe) towards the appointment of his successor. Some lament the possible end to a hawkish Bundesbank that is focused primarily on inflation angst and sees any loosening of monetary policy and the slightest increase in inflation rate as the possible start of a hyperinflationary downward spiral. Others see the appointment of a new Bundesbank president as chance to finally move away from a sometimes confrontational approach towards unconventional monetary policy under Draghi and Lagarde. Whatever side one takes, it is clear that Weidmann has been in the minority in the ECB’s Governing Council over the past decade and has had therefore limited influence. At the same time, one can argue that his position has contributed to the increasing hostility of media and public in Germany vis-à-vis the ECB.
Trying to stick to orthodoxy in monetary policy when the world around one changes seems at best naïve and at worst dangerous. First, it is important to remember that one important reason for the ECB to take a much more prominent, unorthodox role under Draghi after the onset of the eurodebt crisis was the refusal of ‘creditor countries’ (led by Germany) to give fiscal policy the necessary role in crisis mitigation. Second, monetary policy frameworks have to adjust to changes not just in economic structures but also in analytical insights. Over the past decade that I have been discussing monetary, financial stability and euro area policies more broadly with my fellow economists in Germany, I have noticed a clear shift away from orthodoxy to a more realistic approach, moving from ‘we show the rest of Europe how to do it properly’ to the recognition that Germany as anchor country of the euro has not only privileges (and big economic advantages) but also responsibilities. Third, the world has moved on from a view that money supply drives inflation and that monetary and prudential policies are independent of each other to the realisation that financial and monetary stability are inherently related with each other, which requires a much more broader central banking approach (reflected also in the fact that with one exception - Sweden – it is the central bank governors of the EU that have voting power in the General Board of the ESRB, the macroprudential coordination mechanisms of the EU).
So, what does this imply for the next president of the Bundesbank? Isabel Schnabel as member of the ECB Executive Board has given an important example, being a bridge between the ECB and often hostile, inflation-averse German media and public. The new president should see him or herself as being in the centre of the euro area system, being the representative of the anchor country of the euro in the Governing Council of the ECB and actively shaping ECB policies going forward. At the same time, (s)he should be a more active spokesman for the ECB towards the German media and public. The new president can draw on talented staff at the Bundesbank and an increasingly diverse and vibrant world-class economics and finance academic community in Germany. That’s an incredible opportunity and much more promising than tying oneself to historic orthodoxies.
22. Oct, 2021