Jens Weidmann: Bundesbank president is man of principles

Vast windows line one wall of Jens Weidmann's bright Bundesbank office, overlooking Frankfurt's spectacular high-rise skyline as it gleams in the early summer sunshine.

On a shelf opposite, among a collection of honorary medals and a miniature model of Germany’s central bank president, a red and green volume stands out.

Zorn und Zeit (Rage and Time) is a study of a red thread that German philosopher Peter Sloterdijk believes runs through western history: the consequences on others of acting on unfettered anger.

Though the book appeared two years before Lehman Brothers collapsed, it highlights a phenomenon that dominated politics in the subsequent banking and euro crises: rage and resentment to problems always caused exclusively by others, never oneself.

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Prof Sloterdijk, one of Germany’s most influential thinkers, warns that countering this rage effectively requires political balance: “Not by avoiding any necessary battle but not provoking any unnecessary ones either.”

Though Dr Weidmann won't turn 50 until next year, he is already a veteran at picking his battles. As economics adviser to chancellor Angela Merkel in the early days of the euro crisis, he helped devise a bailout blueprint that made German assistance conditional on reforms Berlin viewed as best to boost the sustainability of others' economies.

Betrayal

In 2011, Dr Weidmann became Germany’s youngest ever Bundesbank president after his predecessor Axel Weber walked out of the job in rage, repeatedly outvoted at the ECB governing council on unconventional crisis measures – including sovereign bond-buying – that he viewed as a risky betrayal of the bank’s political independence and mandate.

In the years since, ECB president Mario Draghi has tried to win over Dr Weidmann to the majority position, reportedly even plying the German with wine and crisps in late-night chats.

But Dr Weidmann is a man of principles, not one for cheap dates, and argues persistently that the legacy of ECB efforts to do “whatever it takes” to save the euro is a blurred line between monetary and fiscal policy, easing pressure on reform-shy politicians.

Though the euro crisis has calmed, the ECB’s mandate remains a moveable feast and the Frankfurt bank is still reportedly buying up around €60 billion in bonds monthly from some euro states.

But speculation is building that, after first signals to markets in July, the ECB will reportedly present a timeline in the autumn for a monetary policy shift, winding down bond purchases and ending the low-interest era.

The Bundesbank president insists there is no disagreement at ECB governing council level that expansive policies are appropriate at present but that “diverse views” remain over the necessary degree of monetary expansion.

After 14 consecutive quarters of growth, and unemployment back to single digits, euro economic sentiment is at its highest level in six years.

“We are experiencing a robust eurozone upturn,” said Dr Weidmann, a tall and amenable character with a deep, sonorous voice. “Now the council has to grapple in future with when it begins to look at monetary policy normalisation.”

This brings new challenges to observe its mandate of keeping euro inflation close to two per cent. Current inflation pressures are linked to energy prices, the Bundesbank president says, but he acknowledges challenges ahead.

As well as calming the euro crisis, what if the legacy of the ECB’s bond buying is a collection of tardy euro reformers and periphery countries who will struggle when they leave the ECB’s golden cage for the finance market wilderness?

His eyes flashing in amusement, Dr Weidmann agrees that the euro area could face an era of so-called “fiscal dominance”: where market doubts over some euro states’ reform efforts push up interest rates in those countries faster than elsewhere, sparking inevitable calls for the ECB to intervene longer than necessary to ensure price stability – its core mandate.

Bubbles

Given stern German warnings of recent years, Dr Weidmann warns the central bank must “make a clean breast” of its expansionary exit if it wants to dispel crisis-era doubts over its political independence.

“We cannot allow ourselves delay the normalisation of monetary policy with an eye to state finances in a few countries,” he said. “The test for the ECB will be to tighten up monetary policy when there is a sustainable increase in prices.”

Not existing fast enough from the expansionary era brings perils of its own, he says, and warns that the ECB “cannot just look on as bubbles develop”.

Such as the property bubble the Bundesbank insists isn't inflating in Germany, despite the rush of inflation-wary savers and international investors for bricks-and-mortar safe havens here?

Strictly speaking, Dr Weidmann says, Bundesbank macroeconomic data shows no classic bubble ingredients: reckless lending and borrowing fuelling runaway prices. So this time it’ll be different?

“Naturally the low-cost financing has contributed to the search for profit and to price rises on the property market,” he said. “We see signs of overheating, and various models see an overvaluation in certain [German] regions of between 15 and 30 per cent. Despite certain potential for a correction, however, our view is there are no acute risks for financial stability.”

Despite conciliatory corrections in Berlin's most important bilateral relationship with Paris this week, Dr Merkel's former economic adviser is hopeful of new reform momentum to lift France and the euro area.

But the Frankfurt banker is not afraid to call out France's ongoing failure to bring borrowing in under the Maastricht three per cent debt ceiling. Is this not a case of Animal Farm-style EU policies, with fiscal rules more applicable to some countries than others?

Dr Weidmann picks his words carefully, recalling the “role model” function of large countries like France and Germany – in meeting debt rules or, as happened in the early 2000s, watering them down.

“France is an important partner for us but that in no way means that the budgetary rules don’t apply to France,” he said.

Flexible

But what of other cases where a flexible approach to euro rules did not end in disaster? Take the ECB's 2013 decision to "take note" of how Ireland was to replace state loans to Anglo Irish Bank/IBRC, so-called promissory notes, with long-term bonds running up to 40 years.

The deal eased Ireland’s fiscal position at a critical, cash-strapped moment, but amounted to illegal monetary financing – printing money – in all but name. At the time, the Bundesbank was furious. Is Dr Weidmann happy the bonds are being paid off faster than agreed with the ECB?

“The sooner the better,” he said. “One should in general avoid such precedents.”

The ban on state financing remains an important pillar of the currency union and, as it celebrates its 70th year, the Bundesbank still insists that , in monetary policy, the right thing to do is not always the expedient thing.

“Otherwise one runs the risk that the political and financial squeeze on the central bank will grow ever stronger and at the end what is lost is the credibility to maintain stable prices,” he said.

(Despite his stern words and sermons on orthodoxy, when push came to shove the Bundesbank bit its tongue and averted its gaze on Ireland’s promissory notes.

Nor was it the only Bundesbank gesture for crisis-era Ireland. At our last meeting in 2014, Dr Weidmann revealed that his bank backed Irish efforts to burn bondholders and reduce its debt burden and “make investors bear the risks of their investment decisions”. It wasn’t Berlin or the Bundesbank that pulled the plug on that, but ECB president Jean-Claude Trichet and an ECB governing council majority.)

Countdown

As Dr Weidmann gazes out his office windows, it’s unlikely the new ECB tower will be the last addition to the Frankfurt horizon in the coming post-Brexit era.

With the two-year countdown on Brexit rolling, the ECB is pushing hard for London-based international banks – and the European Banking Authority – to make Frankfurt their new EU base.

Dr Weidmann resists the temptation to become a poster boy for Germany’s financial capital as an interested party who “enjoys Frankfurt and appreciates all the region’s benefits”.

There are more than quality-of-life decisions to consider, he says, and the choice of new homes for financial institutions and agencies is a question “that will be answered very individually”.

And what of reports that 2019, the year of Brexit, could bring change for Dr Weidmann professionally, as a possible Draghi successor?

Considering Prof Sloterdijk’s rage and time model, will enough time have passed to mollify some of the rage in the eurozone towards Germany? Or does recent history – and the wider politics of the single currency – make it impossible for an ECB with a German president any time in the near future?

“If I answered that with yes, we’d have to ask the question if the currency union is working properly,” said Dr Weidmann. “The question presumes that an ECB president is chosen by nationality and, in my view, that would be a bad signal.”