Q You have experienced the euro crisis in the background as an adviser to Chancellor Merkel in Berlin and in the foreground as Bundesbank president in Frankfurt. Which position do you prefer?
A I'm very satisfied with my position here. The Bundesbank fulfils an important mission in safeguarding price stability, and expressing one's opinions openly and having to stand behind the consequences of what I say is very much to my liking. Of course, I also enjoyed my work in the Federal Chancellery and learned a lot about the political arena there. I didn't have to distort my positions in Berlin; it was a very open and collegial co-operation, but I was an advisor, not a policy-maker. I came from the Bundesbank originally, and when I was asked to return and become its president I happily accepted this challenging and interesting task.
Q: Your former professor Prof Manfred Neumann says of you: "Jens is very polite and prefers taking partners to one side for a talk rather than the method of (ex-Bundesbank president) Axel Weber method of banging on the table - which has been proven not to work." Is that a fair description of how you like to operate?
A I don't know if many colleagues in Europe would share this view. The current perception is not necessarily that the Bundesbank or its president hold back their views. But Manfred Neumann is right in that I don't adopt a personal tone. Rather I attempt to keep things at a professional level, being friendly and respectful. In trying to convince people and achieve something, it's always better to exchange arguments than drift into personal conflict, which by the way wasn't Axel Weber's approach either.
Q Were there any occasions of late in the ECB tower where you banged on the table, or wanted to?
A For me it’s not about banging on the table but about presenting consistent, clear opinions that reflect my fundamental convictions. It’s about going into deep discussions, assessing different views and about trying to convince.
Q Your crisis mantra has been that monetary policy cannot be used to solve the fiscal problems of euro states. But is more flexibility on interpretation of ECB monetary policy not the price Germany has to pay for completing the euro's architecture?
A There is a certain room for interpretation regarding the treaties and the mandate of the Eurosystem. But this interpretation must not call into question the monetary union as a stability union. Within these limits I think it’s wise to embrace a tight reading of the mandate so we don’t yield to the temptation of mixing monetary and fiscal policy in a way that endangers central bank independence and our goal of price stability. If a central bank shows once that it is capable of helping countries in a fix, then the chances are high that it will be asked to do so again in the future. It’s important to draw a red line.
Q Can red lines be moved when knowledge of a situation changes or is that an appallingly pragmatic vista for a Bundesbanker?
A Of course, we constantly re-examine our positions as the facts change. For instance, before the crisis we underestimated the risk of contagion in the currency union. The creation of the banking union is one consequence of this lesson learned. But new facts don’t mean you have to throw all your principles overboard. You have to be careful of “this time it’s different” arguments because, for me, some positions in this complex European system are time-tested and should endure. This is the case for the necessity of a clear separation of fiscal and monetary policy. Central banks’ financing of states runs like a red thread through history, and the dangers of this are many and well-known. This is all the more true in a monetary union with one monetary policy and sovereign national fiscal policies.
Q Both euro states and the ECB are doing things now that were unthinkable before the crisis. How does that fit with the Bundesbank philosophy: here I stand, I can do no other?
A I backed many of the crisis measures - the full allotment policy is a good example - but just because there’s a crisis doesn’t mean there are no limits anymore. I share Mario Draghi’s view that there is no way around reforms in crisis countries; rescue packages just bought countries time. The Bundesbank brings a perspective to the debate that is perhaps somewhat conservative and long-term, but the danger of too much short-termism is also a lesson of the crisis.
Q You have warned of late about the long-term negative risks of cheap money on the political appetite for reform. What are they?
A Let us not forget: Europe is coming out of the worst crisis of the post-war years, so I consider an expansive monetary policy to be justified. However, it is also hard to deny that, in the past, politics of cheap money reduced the appetite for structural reforms in countries and fostered excessive risk-taking on financial markets. Thus, while currently defending an expansionary monetary policy stance is appropriate, I am emphasising the importance of not overlooking possible longer-term risks of ultra-low rates.
Q Are you concerned this will contribute to a property bubble in Germany?
A We consider this a phenomenon limited to some urban regions in particular, and don’t see a bubble of systemic concern. Still, we are watching things closely and can’t give the all-clear.
Q Ireland has had to battle the consequences of cheap money in recent years. What concerns do you have about the current level of interest rates in Ireland?
A Low interest rates help to stimulate the economy and dampen debt service costs. That’s particularly relevant for Ireland, given its comparatively high deficit and debt level. Looking ahead, it is crucial that the low level of interest rates does not delay reform efforts in the financial sector and that fiscal policy and the banking system will be able to cope with a normalisation of interest rates.
Q Despite a debt-to-GDP burden of 120 per cent, investors have adopted a positive outlook towards Ireland, reflected in bond interest rates. Have they priced into their calculations the possibility of future debt relief for Ireland?
A Ireland’s progress in the last year is a positive example that adjustment programmes can work, and market sentiment reflects this. The reason trust has returned is because Ireland fulfilled its programme and the government, backed by the population, demonstrated its will to take tough decisions. Any doubt about Ireland honouring its debt could harm this success story.
Q What, in your view, does the Cyprus programme, including debt write-downs, mean for Ireland?
A I don’t think that you can equate the two cases, but the Cypriot experience showed that it is indeed possible to wind down a bank and bail in creditors, thus reducing the burden on taxpayers. Our regulatory efforts are geared towards making an orderly restructuring possible, which also means that deposits would be better protected than in the case of Cyprus.
Q Is the Irish hope that it won’t be left alone with its legacy bank debt misplaced?
A There was assistance in the past and I assume that Ireland, now out of the programme, will be able to meet its commitments without any external assistance.
Q What about the ESM lifting away some of the burden?
A The ESM is already involved, and at very favourable conditions. Taking over the debt burden of other countries was ruled out at the creation of the currency union, and for good reasons. And the agreements of the past weeks have made clear that legacy bank debt remains a primarily national responsibility.
Q The euro zone door to debt write-downs, now open, was held closed by ex-ECB president Trichet for Ireland. Does this argument hold water here?
A The Governing Council then was weighing bail-in versus financial stability risks, and its majority concluded that the latter were more relevant under the concrete circumstances. In that debate the Bundesbank has always considered it important to make investors bear the risks of their investment decisions and already then favoured contributions of investors in the event of solvency problems, especially for banks that are to be wound down. Our common goal is to be able in the future to wind down banks without endangering financial stability.
Q Supposed monetary policy heresies have been pushed through before, such as the promissory note deal. You weren't happy when Michael Noonan went on the radio to talk about the deal. Why?
A I have no problems with transparency. I have a consistent opinion on this which I’ve expressed publicly in the past.
Q Was a line crossed that has brought the ECB into a position of political dependency?
A As you know, I viewed this transaction with great scepticism. At the end of the day, the central bank (of Ireland) largely has the debt on its books and is refinancing it at the main refinancing rate. This transaction is a blurring of monetary and fiscal policy that, from my perspective, risks being perceived as monetary financing. If the impression arises that monetary policy is handling fiscal problems, this would bring central banks into a situation where monetary stability is dominated by fiscal policy. Some might consider the transaction as a kind of a compensation for the Irish support to its banking system, but in my view such transfers should not be the business of central banks.
Q A regularly-heard argument in Ireland is that foreign banks, and German banks, lent recklessly into a bubble and got away lightly while the Irish people carry the burden. What do you say to this argument?
A There are two sides to this story. We had German banks linked to Ireland who were rescued by the German taxpayer. When banks go broke in future, those who are responsible for the decisions - managers, owners and creditors - should pay the price, irrespective of their nationality. I guess the Irish people share this opinion.
Q Only if your opinion is applied retroactively, given that the whole euro area benefitted from the Irish rescue operation.
A Arguing about who profited by how much and when from the currency union or who shouldered the greater cost of the financial crisis doesn’t bring us further. We have to talk about how to prevent this happening in the future.
Q It’s not water under the bridge for Irish people shouldering a debt-to-GDP ratio of 120 per cent...
A … But Ireland also experienced a strong boom after entering EMU, and other countries, too, have to bear crisis-related costs. My point is if you start down this path, things soon become unclear and unproductive. Germany’s federal debt rose considerably also because it had supported German banks with business in Ireland. What is more, Germany shoulders a large part of the euro-area rescue funds.
Q Official reports on the collapse of SachsenLB, Depfa and other German banks in Dublin see blame on both Irish and German sides.
A There has been a huge discussion here about the responsibilities and actions of German banks in the crisis. After its nationalisation, the HRE and its extensive Irish Depfa business was even looked into by a parliamentary investigative committee. However, finger-pointing between Germany and Ireland is not very helpful.
Q There is a feeling going around in Germany, in Ireland too, of being a victim of a monetary union from which others have profited. What are the long-term consequences of this lingering resentment?
A It’s essential to explain the benefits of the European monetary union to the public. And it is also key to implement the lessons learned to prevent a crisis like this one happening again. A strengthened framework of the monetary union, the banking union and financial regulation are part of the response. However, more is needed to sever the doom-loop of the bank-sovereign nexus. In my opinion, an open, sometimes controversial, discussion, such as we have in Germany, is ultimately raising acceptance of the currency union. Some argue that critical views of some ECB decisions, for example, undermine Europe. I feel that, on the contrary, citizens would find it worrisome if difficult decisions in unchartered territory were made without public debate, behind closed doors.
With regard to Germany, you also have to see that citizens were given a promise at the founding of the currency union that the euro would be as strong as the deutschmark. This is a promise they demand is kept.
Q Had you been Bundesbank president in the early 1990s, do you think you would have more luck pointing out to Helmut Kohl the dangers of creating an incomplete currency union?
A At that time the Bundesbank did point out problems of the currency union. It was criticised by some politicians for that position. But its concerns have proven valid. A stable currency union sets political and economic challenges which are sometimes difficult to meet, but it is imperative that they are met. The current euro discussion shows that economic arguments can catch up with you.
Q Have you ever asked yourself how much Bundesbank DNA is still in the ECB?
A The framework and legal statutes of the ECB are very similar to those of the former Bundesbank.
Q DNA can be altered...
A But beware of the consequences of DNA manipulation. Of course, every institution develops its own history and culture, but it’s clear that the goal in the Governing Council remains monetary stability.
Q There were times in recent years when there were misunderstandings on all sides about what Germany views as sensible budgetary policy and why - in particular the issue of deficit-financed state stimulus. Why is that?
A We are not of the opinion that counter-cyclical fiscal policy is bad per se but, for it to work, you need as one basic precondition fiscal room to manoeuvre. When questions are being raised about the sustainability of government finances and investors are reluctant to lend money, further spending is not necessarily the right way to restore trust.
The recent crisis in the euro area was a crisis of trust and it was dramatic. Some countries suffered sudden stops in capital flows. This forced them to demonstrate, credibly, that they were ready to return to the path of sustainable public finances and not to merely fight debt with debt. Restoring trust in public finances is key, and that, for instance, is also why countries should stick to fiscal rules.
Q Many people outside Germany didn’t understand some of Berlin’s demands in the euro crisis. Some viewed its calls for cutbacks in a downturn as misguided or worse. What responsibility do you attribute to Berlin for not getting its thinking across?
A Germany does face an issue of how to explain its positions. Sometimes you have to sing a long time before others pick up the tune. And a gradual rethinking of policy approaches to the crisis is under way: just consider the recent announcement of the French president.
Q It’s striking how many German economists either studied together, shared professors, and have similar so-called ordoliberal economic views. Is such homogeneity healthy?
A In actual fact, German economists are not so homogeneous - we also have our debates. Besides, the academic economic discussion is international, and German economists are a part of it. But it is true; the mainstream view in Germany is that as long as we are not in a political union with centralised economic decisions you cannot have joint liabilities. This would be like all members having credit cards to draw on the same bank account as they like, without spending controls.
Q When you say credit cards, do you mean eurobonds?
A You could say that. Eurobonds without strengthening European institutional structures threaten to undermine the stability orientation of the monetary union and are therefore not good for European citizens. They have an interest in sustainable finances and a stable currency. A joint account with no possibility of controlling spending and ensuring sensible behaviour will soon be overdrawn.
Q Three Germans have left the ECB prematurely. Is there a line in your head where you think, ‘if the ECB crosses this, I’m off’”?
A Our common goal is that the money in people’s pocket remains stable. Being able to contribute to meeting this goal is worthwhile. The Bundesbank plays an important role in the Eurosystem concert; its voice is heard.
After the recent premature resignations of a German ECB chief economist, the Bundesbank president and two German presidents, I have no interest in joining this line-up.
