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Reflections on President Weidmann

Jens Weidmann has announced his resignation as president of the Bundesbank after ten years in office. His views carried little weight in the ECB Governing Council, and the winds have changed in Berlin.

Stefan Gerlach
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German monetary policy makers have made a habit of resigning unexpectedly. First came Bundesbank President Axel Weber and ECB Executive Board member Jürgen Stark in 2011, followed by ECB Executive Board members Jörg Asmussen in 2013 and Sabine Lautenschläger in 2019. And now Bundesbank President Jens Weidmann has announced his resignation.

Even those who have not agreed with all their policy views will be quick to admit that they are hugely able and experienced, and that their objections deserve to be considered in detail.

As with his colleagues, there are surely several factors behind Weidmann’s decision.

In his resignation he cited private reasons. He has been President of the Bundesbank since May 2011. This is an enormously demanding job, with an exhausting travel schedule, long work hours and security considerations imposing restrictions on his private life. And at age 53, he is young enough to launch a new stage of his career.

His hawkish views have been uninfluential at the ECB...

But there must be other explanations.

His views have put him in a small minority of hawks in the ECB’s Governing Council who unsuccessfully sought to stop its negative interest rate and asset purchase policies. The ECB has not heeded his many warnings of the risks of surging inflation. And history has not been kind to them either: Euro area inflation has been below the ECB’s objective for much of his presidency.

Similarly, his concerns that the ECB’s bond buying decision will lead it to become dominated by political considerations have fallen on deaf ears. The appointments of ECB President Christine Lagarde, a former French Minister of Finance, and ECB Vice-President Luis de Guindos, a former Spanish Economy Minister, must have been unsettling for him. In sharp contrast to Weidmann, neither of them has any expertise or background in monetary policy.

In any case, it is not easy to spend a decade being responsible for a policy one fundamentally disagrees with.

...and are outdated in Berlin

The winds of change that are blowing through German politics must also have played a role.

Weidmann has received little support for his hard-line views from the German government, which has supported the ECB’s adoption of increasingly novel policies to sustain the euro. It has recognised that a collapse of the single currency, if seen as due to the intransigence of Berlin, would have had devastating consequences for Germany’s role in the EU.

Furthermore, the next German government will almost surely be led by the SPD, whose economic policy agenda is quite different from that of the CDU and Mrs Merkel, for whom Weidmann served as an economic adviser before becoming Bundesbank President.

With the EU’s and Germany’s fiscal rules seen as outdated because of the world-wide fall in interest rates, and with a growing need for spending on infrastructure and on greening the economy, Weidmann risked losing further influence in Germany. And an SPD-led government would be unlikely to propose him as ECB President when Mme Lagarde’s term ends in 2027.

A generational change

Weidmann’s resignation is likely to lead to a generational change – not in age but in views —at the Bundesbank. The last two decades have not been good to the «Bundesbank view» of monetary policy, which most observers now consider obsolete.

While history suggests that large increases in central bank’s balance sheet are inflationary, they are not if they merely reflect surging demand by banks for deposits at the central bank. In recent years this demand has resulted from a combination of financial institutions worrying about the solvency of counterparties, regulatory changes and, in the case of Switzerland, safe-haven considerations.

Of course, the recent pick-up in inflation has caused some people to say, «I told you so». However, bottlenecks associated with kickstarting the global economy as Covid fades away appear more important than too-expansionary monetary policies in explaining the rise in inflation.

Similarly, the view that fiscal deficits must be strictly controlled has had a bad crash with reality. Austerity is now seen as having aggravated the euro area crisis after 2010 and 2011, triggered Brexit in 2016 and led to a wave of support for far-right, illiberal political parties across Europe.

Finally, the idea that moral hazard – the notion that selling insurance induces people to behave in a riskier manner – should be ranked first of the deadly sins central banks can commit is now seen as exaggerated. While the adverse consequences of central bank bond buying should be kept in mind, its benefits appear far more important.

Who should succeed Weidmann?

Two considerations are likely to be important in the selection of Weidmann’s successor.

First, he or she must be acceptable to all three parties that are likely to form the new German government: the SPD, the liberal FDP, and the Greens. The FDP would no doubt like Weidmann’s successor to have views similar to his. But the SPD and the Greens will prefer someone who is unlikely to object to their calls for a revision of German fiscal rules to allow for more spending on infrastructure and on greening the economy, and for making the EU’s Stability and Growth Pact more flexible. This may lead to a compromise candidate.

Second, she or he must be a plausible candidate to replace Mme Lagarde as ECB president when her term ends. That calls for someone with views close to the centre of the ECB’s Governing Council since the median member determines policy. A monetary hardliner will carry no weight. That also means that it must be someone respected at the highest levels of the international central banking community.

The next President of the Bundesbank is likely to hold views closer to the centre of the ECB’s Governing Council and will therefore be more influential than President Weidmann has been. Overall ECB policy is unlikely to be much affected, but the tensions of recent years will be gone.

And he or she will inevitably be a key contender to replace Mme Lagarde as ECB president in 2027. With the ECB in need of popular support and about a quarter of the euro area population being German, that will be a good thing.

Stefan Gerlach

Stefan Gerlach is Chief Economist at EFG Bank in Zurich and served as Deputy Governor of the Central Bank of Ireland in 2011-2015. Since earning a doctorate in Geneva in 1983, his career has bridged academia and central banking. He has been Professor of economics at the Goethe University in Frankfurt, an External Member of Monetary Policy Committee of the Bank of Mauritius, and Chief Economist at the Hong Kong Monetary Authority. Before joining BIS as a staff economist in 1992 he was an academic in the US.
Stefan Gerlach is Chief Economist at EFG Bank in Zurich and served as Deputy Governor of the Central Bank of Ireland in 2011-2015. Since earning a doctorate in Geneva in 1983, his career has bridged academia and central banking. He has been Professor of economics at the Goethe University in Frankfurt, an External Member of Monetary Policy Committee of the Bank of Mauritius, and Chief Economist at the Hong Kong Monetary Authority. Before joining BIS as a staff economist in 1992 he was an academic in the US.