Posted by: Dirk | February 17, 2011

Bundesbank independence – fact or fiction?

So, the FT confirms what has been rumoured in the last few days:

Angela Merkel has confirmed that Jens Weidmann, her chief economic adviser, will become the next president of Germany’s central bank. The 42-year old will take the helm on May 1, becoming the youngest president in the Bundesbank’s history. [..]

Before taking a closer look at the present, let me describe some issues that normally come up when the Bundesbank elects a new president. First of all, political connections are necessary to get to the top. This is not to say that this is good, but that is the way it has been. However, the top job is normally given to a candidate nearing the end of his career (there has never been a her). That way, independence of the Bundesbank is getting more likely: the president does not have to worry about his future job prospects when making decisions that are likely to influence his popularity with certain crowds/Krauts.

Therefore, the promotion of the chancellor’s chief economic advisor, a 42-year old, is a bit of a surprise. Mr Weidmann, who worked at the IMF and the Bundesbank before, might have the necessary skills and knowledge, but it takes more than that to be president of the Bundesbank. Its independence was guaranteed to install presidents that have courage and will to “lean against the (political) winds”. It is doubtful that Mr Weidmann fits this description. Here is another extract from the FT:

Announcing the changes after a cabinet meeting on Wednesday, Ms Merkel said: “I am convinced [Mr Weidmann] will be an excellent president at the Bundesbank and a representative for Germany who will raise his voice on behalf of a stable culture at the ECB, thus promoting Germany’s own interests.”

What is this supposed to mean? A “stable culture” is a very fuzzy phrase, but perhaps it was meant to be just that. However, burdening Mr Weidmann with ‘promoting Germany’s own interests’ is a phrase that should raise some doubts. Mr Weidmann, as president of the Bundesbank, is also a member of the ECB’s governing council. Here is what the ECB says it does:

The Governing Council is the main decision-making body of the ECB. It consists of

– the six members of the Executive Board, plus
– the governors of the national central banks of the 17 euro area countries.

Responsibilities

– to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to the Eurosystem;
– to formulate monetary policy for the euro area. This includes decisions relating to monetary objectives, key interest rates, the supply of reserves in the Eurosystem, and the establishment of guidelines for the implementation of those decisions.

Well, the most important part is surely ‘to formulate monetary policy for the euro area’. Promoting Germany’s interest is not in the interest of the ECB, which is the central bank of the whole euro zone. The ECB owes its independence to the idea that keeping inflation low and stable is enough to guarantee growth while rendering redistribution of income through inflation or deflation impossible. As it stands, this idea was wrong. Therefore, the case for central bank independence is not a strong one, at least not under the old ideas of monetary policy (inflation-targeting). Powerfrau Angela Merkel perhaps understood this.

Now it is up to Mr Weidmann to do a good job. Für Elise Europa.

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