Dhis image from the euro crisis has impressed many observers: after the meeting of finance ministers and central bank chiefs, the then Federal Finance Minister Wolfgang Schäuble (CDU) and the Bundesbank President hold the press conference.
Schäuble has the first word. He explains the status of the negotiations, makes fun of the overbearing self-confident finance minister of Greece, and lectures on further tough austerity measures. The young man next to him doesn’t make a face. As a co-host, he is diligently silent and waits patiently. He knows: it can take a while with Wolfgang Schäuble.
Jens Weidmann only speaks when it’s his turn. By nature he is a civil servant, not a politician. Friends, opponents, co-workers and colleagues praise the man in his mid-fifties, his manners and loyalty. Weidmann is a clever, pleasant and discreet man. The head of the European Central Bank (ECB), Christine Lagarde, calls him “a good personal friend”.
Chancellor Angela Merkel (CDU) also said goodbye to him from his post in the Chancellery in spring 2011 with unusually warm words. It is always like that. Somehow, the man grows dear to everyone he works with – even if he disagrees with them less and less on the matter.
The economist started his career in 1997 at the International Monetary Fund in Washington. At the latest when he becomes Secretary General of the Expert Council three years later, the Berlin ministries take a close look at those who wear glasses.
Something will come later from the general secretaries of the economy, at least most of the time. Weidmann became the most important economist in Merkel’s Chancellery – and then President of the Bundesbank.
Last Thursday, he surprisingly asked the Federal President to be released. Now he is described as a misunderstood fighter, as a pilot who disembarks bitterly. Just like his predecessors Jürgen Stark and Axel Weber, who loudly dropped the post in the conflict with the European Central Bank.
But Weidmann is not like that. His time has just come. There has been a fundamental reversal of conditions in monetary and financial policy, and the general political situation is also changing in Germany – regardless of the name of the next finance minister. Low interest rates and national debt are no longer an exception; they are part of the political calculation. The central banks are no longer next to politics. You make them.
Weidmann thinks that is wrong. He is the admonisher who sees the glut of money caused by the crisis as a harbinger of greater doom if the exit does not succeed soon. Just that he had neither the power nor the conviction to end the party.
In recent years, he has become a stone guest on the Presidium of the European Central Bank. To take on the same role in the discourse with the federal government may appeal to extroverts. It’s nothing for Weidmann.
It stands for the old Bundesbank line, in which the central bank only looks at the inflation rate and aligns its actions with it. To put it simply: if the inflation rate rises above the mark of two percent per year, interest rates are raised. Because a high inflation rate indicates that the economy is running hot. However, if loans and thus investments become more expensive, demand declines, price pressure weakens, and the economy cools.
Central banks are no longer able to ignite the upswing
Conversely, if growth and demand are weak, providers have no scope for price increases. The central banks stimulate the demand for credit by lowering interest rates. Growth is picking up, the economic cycle is picking up speed again. And so on and so on.
Of course the world is more complicated. The demographic development in the euro zone is structurally weakening demand. Private households save too much, companies invest too little, in good and bad times. The central banks are no longer able to ignite the upswing through low interest rates.
The corona pandemic, climate change and digitization, on the other hand, are forcing governments to spend a lot of money in the short term. As President of the Bundesbank, as previously as an economic advisor in the Chancellery, Weidmann has recognized that in the end the politically possible will prevail. He also agreed when the European Central Bank decided this summer to set the inflation target in the “medium term” in the future. Which means nothing else than that you accept a higher rate of devaluation if the prospect is favorable.
But central bankers like Weidmann believe that, for all the imperfections of the traditional inflation model, monetary stability is still the best measure of central bank policy. This attitude has become out of fashion in recent years.
Lagarde risks being politically instrumentalized
The strict separation of monetary and financial policy seems even more traditional. The ECB is not allowed to finance the countries of the euro zone. Actually. In fact, however, it has been buying up government bonds on a large scale since the financial crisis and has repeatedly provided the governments with fresh money. The central bank has announced that it will reduce these programs and let them expire in the coming year. But at the same time she wants to take climate aspects into account more strongly in the future and thus creates the next argument to intervene again in case of doubt.
Weidmann defended this decision. Climate change will have an impact on inflation and growth expectations in Europe and must therefore be included. Here, too, he urged his colleagues in the Presidium to be careful. ECB President Lagarde puts it researcher. It makes climate protection one of the central bank’s goals – and risks being politically instrumentalized.
Worse still: The new federal government, which is currently being negotiated in Berlin, could exploit a loophole in the Corona legislation. Because the debt brake will not apply again until 2023, the state could go into another major debt in 2022.
Marcel Fratzscher, head of the German Institute for Economic Research, thinks that up to 500 billion euros could be mobilized and spent on climate protection investments in the coming years. Even if FDP leader Christian Lindner has spoken out against a debt reserve, none of the three parties negotiating the new government has so far denied such considerations.
This may have been the last occasion for the Bundesbank President to resign. If those who wrote the debt brake into the Basic Law just ten years ago are betting on the long-suffering of the central bank, it’s not just a battle, then the war is lost.
As Federal Chancellor Helmut Schmidt (SPD) once said at the end of the 1970s that he would prefer five percent inflation to five percent unemployment. Robert Habeck, head of the Greens and one of the candidates for the post of finance minister, put it this way last week: “For the future, we need a Bundesbank that can respond to the challenges of the times.”
The prospect of being able to speak more at future press conferences than at the events with Wolfgang Schäuble may have appealed to the Bundesbank President. But having to wash the head of the new finance minister in the open could have tormented Weidmann in his darkest dreams. The end of the year is over.