President, Deutsche Bundesbank
Peter G. Peterson Distinguished Scholar, Henry A. Kissinger Center for Global Affairs, Johns Hopkins School of Advanced International Studies
Jens Weidmann discusses the challenges facing the Deutsche Bundesbank, the role of central banks in Europe, and the global effects of transatlantic trade tensions.
This event is cosponsored with the American Council on Germany.
The C. Peter McColough Series on International Economics brings the world's foremost economic policymakers and scholars to address members on current topics in international economics and U.S. monetary policy. This meeting series is presented by the Maurice R. Greenberg Center for Geoeconomic Studies.
LIPSKY: Welcome to a conversation with Jens Weidmann, the president of the Deutsche Bundesbank. I’d like to welcome you to today’s C. Peter McColough Series on International Economics. It’s co-sponsored by the American Council on Germany and the Council on Foreign Relations. I’m John Lipsky. Have the honor of being the Peter J. Peterson distinguished scholar at the Henry A. Kissinger Center for Global Affairs at the Paul H. Nitze School of Advanced International Studies of Johns Hopkins University. (Laughter.) And very proud of it. And I have the honor to be presiding over today’s discussions.
Now, as you’re going to see in a moment, if you haven’t already seen Jens Weidmann, president Weidmann in person, you’re going to say right away: This is quite a young fellow to be a central bank governor or president. But the truth is, he’s already been a central bank governor for more than eight years. So he was really young when he started. And I’m going to tell you just a few—just a few highlights of his CV. And there are two themes that you should take away. One, that he’s done an awful lot in a short span of time. And, secondly, that you’ll be impressed at the breadth of his experience.
For one, born in North Rhine-Westphalia, but did his undergraduate work at the—at the University of Aix in Marseille. And then did a doctorate at Bonn University. He did an internship at the Bank of France, and also at the National Bank of Rwanda. He was a research assistant at Bonn University’s Institute for International Economic policy and was awarded a Ph.D. from that university. I’m very happy to say he spent a couple years in Washington at the International Monetary Fund, then became the secretary-general of the German Council of Economic Experts, headed the Deutsche Bundesbank’s monetary and policy analysis division, was the deputy head of the economics department.
In 2006, became an advisor to the chancellor as the head of the Department for Economic and Fiscal Policy in the chancellor’s office. And at that time became also the Sherpa that represented the chancellor in the preparation of both the G-8 and the G-20 summits. In May 2011, he was named president of the Deutsche Bundesbank at the young age of forty-three. He, of course, serves in this capacity as a member of the governing council of the ECB. He’s a governor of the International Monetary Fund. And that’s what brings him here on his way down to Washington for the annual meetings. He’s the board chair of the Bank for International Settlements. And is, of course, well-known as a commentator on international issues and, most importantly, on European monetary and economic affairs.
Without further ado, let me welcome President Jens Weidmann to the podium here to make some remarks. Jens. (Applause.)
WEIDMANN: Well, thank you very much, John, for your kind words of introduction. As Jean-Claude Trichet used to say in those circumstances, that my father would have been proud, and my mother would have even believed you. (Laughter.) So thanks a lot. And we know from the time of the crisis, when we worked together on resolving the crisis. So I’m very happy to find you here, to meet some of the old friends again.
Dear Richard, dear Steven, ladies and gentlemen, it’s a pleasure to be here today with you and in this, I will say, distinguished—discuss with this distinguished audience. Although, I must confess, I’m still time-zone-wise somehow between here at Germany. So I’m in the middle of the Atlantic. So I apologize for being perhaps a bit slow for the Q&A session afterwards.
So if our meeting had taken place two hundred million years ago, my journey to New York would have been even shorter than it actually was. At that time, all of the landmasses on Earth were joined together in the supercontinent of Pangea. And that supercontinent included North America, but also Europe. And New York City, the spot where we’re meeting today, would have been at the very heart of our common continent. Tectonic plate shifts caused Pangea, as you all know, to break apart, and created the world as we know it today. Since then, North America and Europe have been separated by the Atlantic Ocean. Indeed, our continents keep drifting apart, by about one inch every year.
Unfortunately, this may be true in the figurative sense as well when it comes to the matter of mutual understanding on both sides of the Atlantic. The gap appears to be expanding rather than contracting. But there is a big difference between geology and geopolitics. While the continental drift between the United States and Europe can’t be slowed or even halted, the political distance between them is neither inevitable nor irreversible. To bridge the divides, we have to talk to each other. And that is why events like today’s and the activities by the Council on Foreign Relations and the American Council on Germany in general are so important. So once again, I would like to thank you for inviting me here today. And it’s a great pleasure to be part of a debate with such a distinguished audience.
To kick off the forthcoming discussion, I would like to sketch out a couple of thoughts on transatlantic relations from the perspective of a German central banker, and in particular on the German current account surplus, trade tensions, and the role of central banks. We may be separated by an ocean today, but the United States and Europe are held together by strong economic ties, being the foremost trading partners in the world. And Germany, in particular, is one of the most important trade and investment partners for the U.S. In 2018, our bilateral trade in goods alone totaled $184 billion U.S.
And to some this exchange appears lopsided, as German merchandise exports outstrip imports by far, contributing to a surplus in the bilateral current account vis-à-vis the U.S. However, Germany doesn’t just export goods. The flipside of the story is that it also exports capital that forces growth, jobs, and prosperity on this side of the Atlantic. Indeed, about 11 percent of the foreign direct investment stock in the U.S. comes from Germany. Moreover, of course, purely bilateral considerations are highly misleading. Nobel Laureate Robert Solow hit the nail on the head when he complained, and I quote, “I have a chronic deficit with my barber, who doesn’t buy a darn thing from me.”
In the world where the division of labor has global dimensions, bilateral trade balances generally don’t have much explanatory value. And this is especially true with respect to the European Union and its single internal market. Not only do German exports contain inputs from other EU member states, U.S. goods and services may also reach German customers by our trading—our partner countries. In fact, vis-à-vis EU as a whole, the United States has run a current account surplus in every year since 2009, according to the official U.S. statistics.
But even beyond the bilateral perspective, Germany runs a current account surplus with the rest of the world. And indeed, this surplus has been very high for an extended period of time, and its sustainability has been questioned. And rightly so. Therefore, we have to take a closer look at the driving forces. It’s a bit like geoscience. Gaining knowledge requires looking beyond the surface and investigating the underlying forces. Put very simply, and as you all know, when a country has a current account surplus, this means that it saves more than it invests.
In Germany, the rise of corporate savings was one of the key drivers of developments after the turn of the millennium. Back then, German firms faced rather high debt levels, and responded by reducing the distribution of profits to company owners. Their equity levels are sound again in the meantime, so it would be quite plausible that they increase their payouts and, indeed, this tendency has already contributed to the decline in the current account surplus since 2015.
But there are also calls for targeted political measures by German authorities to reduce the surplus. However, this is, in my view, much easier said than done. A country’s current account is a result of multilayered market processes that offer few options for policymakers to address distortions. All eyes are now on fiscal policy. And Germany is often called on to increase fiscal—public spending. And it is correct that Germany has filled up fiscal space in recent years, but an expansionary fiscal policy is already incorporated in the budget plans of the government.
And in the short term, some additional fiscal spending might still be possible. However, with respect to macroeconomic stabilization, any further stimulus appears unnecessary unless a perceptible iteration in the economic outlook becomes apparent. Why do I say this? The output gap in Germany, which is one of the key measures, of course, economists should be looking at, is about to close. And forecasts don’t foresee a marked iteration. So from a purely domestic perspective, a stimulus program doesn’t really appear warranted. And if you look at the spillovers to other countries, at least that’s what our—what our empirical analysis tells us—these spillovers to other countries of the euro area are rather small, depending of course on the composition of any such program.
Also, I would be, in my view, quite important to use that leeway wisely in order at the end of the day not only to create a flash in the pan, but to promote sustainable growth in the long run. Targeted investment in infrastructure, expenditure on research and education, and promoting incentives to work and invest by reducing taxations are key words in that context. And climate change is another important challenge where the German government has just proposed a package of measures. To sum up, the current account surplus is already in the process of shrinking, and the loosening of fiscal policies may contribute to that. But we shouldn’t expect miracles.
According to our calculations, and even in a more optimistic scenario, fiscal policy measures of a realistic size would reduce only a small part of Germany’s current account surplus. They would raise imports only to some extent. And the impact on the current account deficit to GDP ratio in the U.S., which seems to be the key focus of some here, would be even far smaller. When intuitive reason is, of course, that the difference in sheer economic size dominates. The U.S. economy is roughly five times as large as the German economy.
When considering options beyond fiscal policy import tariffs in particular seems to be back in fashion. Proponents believe that higher tariffs can solve several problems at once, a claim that raising tariffs can reduce current account deficits, protect jobs, and make people better off. And this belief, in my view, is mistaken. Indeed, even the impact of new tariffs on the current account balance is ambiguous. Intuitively imports will be reduced. But exports are likely to fall at the same time due to weaker foreign demand and then appreciation of the domestic currency.
More importantly, by introducing new tariffs, a country runs the risk of damaging its own economy if tariffs increase the prices of important goods and this weakens the purchasing power of consumers. Indeed, American researchers have found that the U.S. tariffs, introduced last year, were almost complete passed through into U.S. domestic prices. Retaliatory tariffs adopted by other countries will probably even further the damage. As Roberto Azevêdo, the director-general of the WTO warned, an eye for an eye will leave us all blind. The trade conflict between the United States and China show what this means. According to Bundesbank simulations, the measures that have been adopted or brought up could half the output of both countries by more than half a percent over the medium term, and world trade would be reduced by 1 ½ percent.
Having said that, there are, of course, legitimate concerns regarding economic relations with China. Indeed, not only the U.S. is pressing for changes. In a joint communication the European Commission likewise criticizes the lack of reciprocal market access. China shields its domestic companies from competition through numerous measures. For example, European companies have to fulfill several preconditions to access the Chinese market, such as transferring key technologies to Chinese counterparts. So one thing is quite clear, China’s state-led economy poses challenges for both the United States and Europe. And this is just one reason why bilateral negotiations are not enough. We need multilateral approaches and rules that ensure fair competition in a global trade and investment—in global trade and investment.
Multilateralism is enshrined in the World Trade Organization. And while its rulebook needs an update, the WTO has fostered global trade and prosperity for twenty-five years now. A particular important achievement has been, in my view, its dispute settlement mechanism. And the recent ruling by WTO arbitrators regarding trade in civil aircraft demonstrate that the system is working. By contrast, a full-blown trade war between the United States and the European Union could cost both sides quite dearly. The potential adverse effects might be considerably larger than in the case of the trade spat with China.
For comparison, just to put this into context, the value of U.S. exports to the EU is three times greater than the value of its exports to China. Assuming in a purely hypothetical scenario that new tariffs of 25 percent were imposed on all bilateral trade flows between the U.S. and the EU, a simulation by my staff suggest that such a trade war could shrink the U.S. output by 1 ½ percent over the medium term, and other countries would be also quite severely affected negatively, to a lesser extent of course. World trade, in that scenario would be diminished by 3 ½ percent.
Of course, such quantitative model exercises should be taken with the proverbial pinch of salt, however one thing, in my view, needs to be clear. Trade is not a zero-sum game. Erecting trade barriers means distorting the global economy and lowering the level of activity worldwide. And retaliatory tariffs may affect the distribution of wealth or losses across countries to some extent, but they will reduce output even further.
Ladies and gentlemen, the tariffs enacted since the beginning of last year are already weighing on world trade. Moreover, the ongoing trade spats have undermined business sentiment and contributed to the higher level of uncertainty that we are observing. These are key factors behind the current weakness in the global economy. A further escalation of trade conflicts remains one of the most important risks, despite the latest signs of progress in the trade talks between China and the U.S.
Conversely, you can also put it positively. Ending the trade conflict would be a perfect remedy to counter the current economic weakness—i.e., would also constitute a very steep stimulus program. But in this situation, central banks aiming for price stability have to act if the inflation outlook is affected. Beyond that, I find it quite worrying that when trade policy debates become entangled with monetary policy issues. Allegations have been raised that some countries are intentionally devaluing their currencies with the aim of improving domestic price competitiveness at the expense of their trading partners. A series of competitive devaluations, nowadays often called a currency war, could erode financial stability and damage all economies involved.
However, as far as I can see, no major economy is currently engaging in strategic competitive devaluation, far less in a currency war. To be clear, from a monetary policy perspective, exchange rates are an important transmission channel because they may affect inflation by input prices, for example. But neither the Federal Reserve nor the euro system target exchange rates. The euro system’s primary objective is to maintain price stability in the euro area, and the Fed has a similar domestic mandate which also includes employment. Of course, that does not mean that one could not discuss specific monetary policy measures in terms of their effectiveness and side effects, but that’s a completely different story.
What the debate on competitive devaluations illustrates is above all, in my view, that political pressures on central banks have risen quite markedly recently. Attempts by politicians to influence monetary policy are not thing new, though. What is new, however, is the impression that the classic tradeoff between price stability and other economic policy objectives may have vanished for good against the background of the low inflation environment.
In principle, both monetary and fiscal policy strive to stimulate the economy in that context. Some observers thus claim that monetary policy and fiscal policy should act in concert, and that central bankers should bow to politicians. They evidently believe that central bank independence is superfluous in this day in age. And if you want the culmination of this, is the modern monetary theory which pushes this argument to its limit by postulating fiscal dominance as the new paradigm.
It is true that at the lower bound of interest rate, fiscal policy is, in theory, often considered a powerful and perhaps even more powerful instrument than monetary policy. And in the current environment, you also might have noted that the ECB governing council reminds governments of their responsibility for macroeconomic stabilization and also for longer-term growth. However, the interests of monetary policy and fiscal policy will, of course, not overlap forever. And U.S. magazine The Economist asserts in its latest issue that the link between unemployment and high inflation has gone missing, referring to a strange new world.
But history also advises caution in this respect. As Alan Greenspan once observed, history is strewn with visions of such new eras that, in the end, have proven to be a mirage. Indeed, other studies stress that the reports of the death of the so-called Phillips curve may be greatly exaggerated. And a recent Bundesbank study finds that in Germany the cyclical impact of wages on prices, which is what it’s all about in the Phillips curve, is still intact. While the passthrough of wages changes—of wage changes has diminished since the 1970s, it has been broadly stable lately. Indeed, a 1 percent rise in wage growth would ultimately push up consumer prices by around 0.3 percent. But this passthrough can take several years, depending on the circumstances. So a slow firming of inflation shouldn’t really be a surprise.
When central banks hit their inflation goals, at the very latest, monetary policy makers have to be able to make the autonomous decision to withdraw the monetary policy stimulus. And this, I think, is encapsulated best in the famous words of former Fed Chair William Martin, who once quipped that the Fed’s job is to remove the punchbowl just when the party was really warming up. So it would be naïve to believe that politicians would then relinquish their influence over the central bank or give precedence to the objective of price stability over their own agenda. And that is why independent monetary policymakers, independent central banks if you want, with a clear mandate remain a key foundation to ensure price stability, but also long-term sustainable growth in the future as well.
And in my view, it is all the more important for central banks to stick to a narrow interpretation of their mandate. In fact, it’s hard to square the independence of a public sector institution with democratic principles. In Europe, it has been granted to monetary policy as an exception for the specific aim of safeguarding price stability. And if the mandate were interpreted broadly, then independence would be called into question sooner or later, and rightly so.
Ladies and gentlemen, during the era or the Pangean supercontinent, a mountain range stretched through this very spot. And in a way, this continues to shape the Manhattan cityscape even today. Under the weight of these mountains, a particularly hard layer of rock was formed, and the mountains were eroded by the forces of nature over millions of years, but the remaining hard layer of rock provides the indispensable foundation for today’s skyscrapers. Thus, the Manhattan skyline is also a reminder of the importance of a solid footing. And the foundation of the European monetary union needs to be rendered firmer still to remain in the picture.
The sovereign debt crisis in the euro area was born out of institutional weaknesses as well. And as far as its resolution and underlying causes are concerned, a lot has happened in recent years, with the banking union, in my view, being one of the largest integration steps we’ve seen since in the introduction of the euro. However, you could still say that the monetary union has a strong leg and a weak leg. From the outset, the strong leg has been its monetary framework with the independence of central banks and the prohibition of monetary financing of governments enshrined in the European treaties. The weak leg is its framework for fiscal and economic policy. Decision making here continues to reside largely with member states, while joint liability has tended to increase in recent years.
To resolve this weakness, some observers have proposed the creation of a true fiscal union, where decision-making powers would be shifted to the European level. And as Thomas Sargent observed in his Nobel lecture, Americans faced a quite similar, perhaps even more pressing, situation a long time ago after the Revolutionary War. The Articles of Confederation has placed fiscal sovereignty largely in the hands of the state, but the young Republic was creaking under the strain of common war debt.
Following intense debate, Americans eventually opted for a fiscal union. But it was embedded in a strong political union resting on democratically legitimized institutions. The new Constitution created a federal government with a range of enforceable powers, fitting within a very sophisticated system of checks and balances. Is this model one that could work for Europe as well? Surely American history can teach us very important lessons. And a key point may be that even with a federal state, action and liability must be finely balanced, as was highlighted by the default of several U.S. states in the nineteenth century.
So that concludes my introductory remarks. I’m looking forward to the discussion with you. Thank you for having me. (Applause.)
LIPSKY: Great. Thanks very much. We’re going to have, as usual, a brief discussion, and then we will turn to the audience for questions and answers. And I’m sure there’s a lot of interest on many of the things that you’ve said, and there may even be some topics that they wish to explore that we won’t have. But we’ll leave plenty of time for questions.
Jens, thanks very much for those remarks. Let me carry on with the looking at European issues, because that seems to be front and center. Let me start with a very simple question. Brexit. (Laughter.)
WEIDMANN: I was hoping to escape that one.
LIPSKY: Oh. Well, we can move along.
WEIDMANN: Oh, no, no. It’s OK.
LIPSKY: But we can treat it quite simply. Is the financial system in—the euro financial system ready to deal with any potential shocks growing out of whatever happens with Brexit?
WEIDMANN: I think by now we should be. I mean, one of our main job as banking supervisors over the past months has been to urge the financial institutions to prepare themselves for a disorderly Brexit. That’s what we’re talking about, a disorderly Brexit which is somehow in the cards, of course. So I would tend to say yes to your question, but on the other hand this is an event that might have severe repercussions also on the macro economy. So it’s not done by, let’s say, understanding all the financial interlinkages and preparing the banks for this event. But we should also be prepared for severe adverse effects on the economy, as such, and disruptions at the borders, et cetera. And so I would say that’s a scenario you would really want to avoid, even if you are prepared.
LIPSKY: Mmm hmm. If we look just at the financial system, as you mentioned and implied, since the crisis a number of steps have been taken with regard to banking union and capital markets union that, however, remain incomplete. You’ve created the European Stability Mechanism, the Single Supervisory Mechanism, the Single Resolution Mechanism, and the Single Resolution Fund. But the banking union still remains incomplete in many ways, including the lack of a deposit insurance across the whole euro area. Are there some steps that you think are still necessary to ensure a crisis-proof EU system, a euro system? Or are we—
WEIDMANN: No, we’re certainly not done yet. I mean, if that answers your question. I mean, first of all, coming back to the banking union, I think as you said the deposit insurance scheme is certainly the one missing element that is not yet fully sketched out. And there, my point would be that it’s important to do the steps in the right order and to balance liability and control. So first we have to reduce, let’s say, the lingering non-performing loans in some of the balance sheets because if you then assume responsibility for the whole system, in a sense, you want to get it cleared first from the, let’s say, legacy problems of the past. And at the end of the day, action liability has to be—has to be balanced. And that’s one of the discussions we are having.
So what’s the extent of how much do we have to reduce the nonperforming loans in the balance sheets? How do we treat the sovereign debt in the balance sheets of banks? Because that’s still one of the topics that is not really fully discussed, in my view, and fully treated, because some of the banks, some of the countries have a lot of sovereign debt in their balance sheet. And you, of course, don’t want to ensure through a deposit insurance scheme the severance, and basically create a common liability for sovereign debt.
LIPSKY: So even some of the legacies of the crisis of 2010-11 still have yet to be—to be cleared up?
WEIDMANN: Absolutely. If you look at the—(inaudible)—ratios in some of the countries, they are still—there’s a lot of heterogeneity across countries. That’s one point. And so the average looks much better than the underlying, if you want, across country developments.
LIPSKY: Are there steps that need to be taken to ensure that that cleanup actually occurs?
WEIDMANN: Well, that’s only one precondition to advance with the creation of a common deposit insurance. And then we have to discuss the design of that common deposit insurance and how it looks like at the end of the day.
LIPSKY: It’s often the European or euro system is compared with the U.S., in the sense that the euro system remains very bank-centric, the U.S. system capital market-centric. We’re a long way from capital markets union in Europe. Is that an important element of improving the performance of the euro economy?
WEIDMANN: Absolutely. That’s one point I forgot to answer in your last question, actually. (Laughs.) So, no, in my view I think the capital markets union is one of the key projects looking ahead, because it can only also to some extent relax a bit the heated political debate about fiscal risk sharing. In a sense, a full-blown capital markets union could help to spread risks across the euro area and between countries because the more you can directly hold assets in other countries, and as a shareholder, the more, of course, risks are propagated. And in a sense you have a buffer that helps you to cope with fluctuations.
And if you look at the U.S., that’s exactly what it—what turns out. I mean, the buffer function of the capital market—of the common capital market is much more important than the redistribution of burden through the fiscal side. So the capital markets union, in my view, is for itself an important step. Not because the bank-centric system is not right for Europe, but it would be an addition, a complement if you want. But it would also help to cope with idiosyncratic shocks in the—in the euro area better than now, even without having a fiscal union or fiscal risk sharing mechanisms.
LIPSKY: Mmm hmm. And what are the next steps needed to make that happen? Is this basically a political project, or are there things that the monetary authorities in the ECB can do?
WEIDMANN: I think we can certainly help analyzing the impediments and supporting the project politically. At the end of the day, it boils down to, I think, very difficult nitty-gritty decisions you have to make as a policymaker. I mean, you end up discussing harmonization of the insolvency laws, for instance. And those are heavily intertwined with the rest of the legal systems in our countries. So it’s easy to ask for a capital markets union, but I think it’s a difficult project in the sense that you cannot just with one political decision enact it tomorrow, but you have to go into details and really look at the impediments. And, again, when you’re discussing solvency laws, foreclosure regimes, and so on, that’s then going down to the heart also of what some consider their sovereignty.
LIPSKY: So progress is important, but we shouldn’t expect rapid movement?
WEIDMANN: We should urge, we should help, but it won’t be there tomorrow, I would say.
LIPSKY: Now, let me ask a question about the elephant in the room. And that is negative bond yields. Today ten year bunds trade at negatives—I guess it’s just about 0.4 percent, which is, I think, something unanticipated by anyone, that this could occur on a sustained basis. What is the cause? Is it a danger? Is it making the system more vulnerable? Does something need to be done?
WEIDMANN: Well, I would argue the causes are multifaceted, in a sense. It’s, of course, to some extent, the central banks intervening also now at the long end of the market. And that shows its influence. On the other hand, it’s also more structural, secular forces that are—that are at play. I mean, that’s why we central banks urge the governments to increase the long-term growth rates, because in the long run, of course, the real interest rates should equal somehow the long-term—the long-term growth. And if you look at Germany, if you look at the euro area more broadly, you see a trend of declining growth rates, which has to do with, of course, our demographic situation in some countries, but also with a very lackluster productivity growth. So structural policies could help—could help as well.
LIPSKY: Thanks. If you get the impression that I would be very happy to continue discussing with Jens for a long time, you’re right. But it’s time to make sure that you folks get a chance to ask him questions as well. So at this time we’re going to invite members to join our conversation with questions. I remind you that this meeting is on the record. When you’re recognized please wait for the microphone, speak—
WEIDMANN: More a reminder for me, I guess, than for—(laughter)—
LIPSKY: Well, at any rate. Wait for the microphone, speak directly, please stand, state your name and affiliation, limit yourself to one question, and keep it concise, please.
Sir. I believe that’s Mr. David Marsh.
WEIDMANN: David, yes. (Laughs.) I have to travel to New York, David, to talk to you. That’s—(laughter)—
Q: Yes. You didn’t mention, Mr. Weidmann, the little family feud that seems to have broken out in the ECB. We don’t want to go into that at all, of course. Not at all interesting. But you did say the Phillips curve isn’t dead. And in fact, your colleague Mr. Knot made a similar point earlier on today. Do you think—
WEIDMANN: Also, the ECB makes that point, so we’re not—that’s not—
Q: Everybody agrees. But do you think there are any considerations, any conditions under which in the next six months, shall we say, the inflation outlook would have got that much worse—i.e., inflation would have increased? Growth could easily pick up as well, under which the easing package, very grand package that it was, could perhaps be revised even within six months? Is there any conditions under which that would happen, in a relatively benign scenario, I would say?
WEIDMANN: Well, let’s—I would say a rather—a very hypothetical question, David, you are putting forward here. And I think there’s no use in discussing very extreme scenarios that I would consider rather unlikely. I mean, we have a baseline scenario that is embedded in our forecast that I think is still the most likely scenario looking ahead. That’s the scenario of a soft patch that is longer and also more deeper, I would say, than we initially thought. But it’s one that—and I alluded to that in my speech, that also means that inflation rates are slowly—or inflation pressures, domestic inflation pressures, are slowly building up. And we have an increase in domestic price pressures over the projection run.
That’s still my—that’s my baseline scenario. And speculating about any short-term price fluctuations, though which we would have to look through in some of the cases anyhow—because, as you know, oil prices—or price fluctuations caused by oil prices should not really be a monetary policy issue, because we are concerned with the long-term developments, and thus with domestic price pressures, and not with short-term fluctuations of the—of the inflation rate.
But you also alluded to the fact that the debate in the governing council regarding the package was quite diverse, or controversial as you might say. There were different views regarding where the—not only—not because—not about whether we should act. That was uncontested. But whether a package of that size was really necessary, and whether it was really warranted to restart the QE program, which in the European context is even more special than in other—in other currency areas, if you want, because of the institutional framework that I mentioned in my—in my—in my speech. That was the discussion. But I think we should now—
Q: (Off mic.)
WEIDMANN: We should now move on, exactly. (Laughter.)
LIPSKY: Very good. Next? Over here. Niso Abuaf.
Q: I’m with Pace University.
Earlier on you said that the, again, question regards the elephant in the room regarding the very low real rates of interest. Global GDP’s at 3 percent, as you know. U.S. GDP around 2 percent., minus European 1 (percent). So to the extent that real rates—the reason of real rates are multifactorial, has your team or anybody that you know done a factor analyses—percentage of holdings by central banks, asset demands for safe assets, lack of investment demand and so forth? Could you shed any more light on that, please?
WEIDMANN: Yeah. I think we’ve done that. And while the central banking community has done that, we’ve discussed it in Basel. But I really shy away from giving you now the exact percentages because I’m sure that I won’t remember them correctly. So I just—what I suggest to you, I give you a reference before leaving of course, not after leaving, before leaving. And then you can—we’re glad to share that analysis with you, yeah. We’ve done that also in the context of the regulatory changes, of course.
Q: Robyn Meredith, Bank of New York Mellon.
I wanted to see—hear from you, how are you thinking about the interplay in the global economy between the end of the era of smooth globalization—as I say, you had kind of alluded to this in your speech. Tariffs are increasing, you know, which tended to bring down prices globally. And now these persistently low rates. Could they in some ways cancel each other out as the cost of the trade rises in consumer prices?
WEIDMANN: Yeah, perhaps in the short term, but it wouldn’t really be good news, in a sense. (Laughter.) No, of course that’s exactly at the core of, let’s say, the monetary policy debate about how to react to those trade impediments, because in the short term they are increasing prices—depressing output, but increasing prices. So as a monetary policymaker, you could be tempted to lean back and say, OK, that’s fine. That partly solves my problem. But in the end of the day it’s only reinforcing other negative tendencies regarding output, for instance. And in that situation where risk is one of the dominant, or the high level of risk is one of the dominant factors, so I don’t take too much comfort of the short-term effect of tariffs.
And on a deeper—on a deeper level, responding to your question, to some extent I think, John, perhaps we failed as economists and also as institutions, and I would, perhaps, include you the banks, to explain to the public what globalization means and how to cope with it. We restricted ourselves and contented ourselves looking at the aggregate effects which are, of course, clearly positive. And thus lobbied, advocated further liberalization of markets and of trade. I think what we disregarded to a large extent as economists were the distributional effects of what was going on. And it doesn’t only relate to globalization. I think technological progress is exactly the same effects, and most of the time on exactly the same population cohorts or groups.
And to think about how to not only, let’s say, adapt the economy in a way that it can cope better with globalization and technological progress, but also how to cope better with the distribution effects, I think that is an issue we neglected in the past. And that is now in a way firing back on us, and so on. Yeah.
LIPSKY: Way in the back there.
Q: Good afternoon, Mr. Weidmann. Seema Mody with CNBC.
I was wondering if you could shed light on the preparation of a German fiscal stimulus package, the possible contents, timeline, and type of political pressure it may be facing.
WEIDMANN: Yes. I think the answer to that is short. I cannot shed light on a fiscal stimulus package because, according to what I see, there is none. (Laughter.) So—and as I tried to explain before—(inaudible)—who you might know, the former chief economist of the ECB, once used, I think, a very nice story to illustrate the debate we’re currently having. Imagine you’re an economist from Mars and look at the Earth. And you see a country which has almost full capacity utilization. I said that the output gap was about to be closed. The labor markets are cleared. We even have scarcities in regional labor markets in Germany. Of course, the output is a bit grimmer than that picture, but the situation is quite extraordinarily good.
We have this industry issues and we have this slowdown in industry, but there are issues in looking at the forecast that has been revised, but the economy is working almost with a closed output gap. And labor markets are quite strong. Wages are increasing more than in the past. I would say more or less in line with what we see in the economy. Would you really advise that economy, if it weren’t Germany, to start a fiscal stimulus package? Looking at the domestic—because you have to see, that’s German taxpayers spending money. And why should they spend money in a situation where the economy is operating at full capacity?
And then you can make the point, OK, let’s do it because it might have spillovers to other economies. But then you’re back in that—in that—in the question, to what extent can you ask a German taxpayer to spend money to stimulate another economy? And this is one point. So this is a more philosophical point. But the factual point is, would it really work? And there, our simulations clearly show that if you build bridges in Germany—which is the common request, building autobahn and riches in Germany, just through public investment, of course. That’s what you can spend quickly, which is by the way not true, because our very cumbersome bureaucratic procedure make that a rather lengthy process.
But does this really help a firm in Portugal or in Spain? And what we find in our economic analysis is that it does not, or to a very, very limited extent. So I’m a bit surprised that whenever I come to Washington—this is not Washington. I’m fully aware that this is New York. But the discussion seems to be quite similar. Whenever I come to the four meetings in Washington, we have the debate about Germany spending more. Regardless, by the way, of the situation we’re in. So that’s a big spooky, I think. But you’re right, there might be circumstances in which this is a more relevant issue. But you also have to keep in mind that in our case the automatic stabilizers are quite strong, which is something you don’t have to that extent in the U.S., for instance.
So our social security system is, to some extent, automatically stabilizing the economy. And those automatic stabilizers are very powerful in Germany, less powerful in other countries. So that’s the first line of defense. Then the second, more controversial line, is a discretionary spending program which has to be well-timed, well- designed, and you have to make sure, again, that it doesn’t end up as a flash in the pan, but it does something useful. But that’s not where we are now. But I think the willingness of the German government to think about contingency plans, that’s what we’re really talking about. That has certainly increased. There is an awareness that we’re not talking about 2007, when we tried to devise a program to cope with the crisis.
LIPSKY: Yes, sir. Right in the back. Gentleman in the back.
WEIDMANN: And by the way, what is completely disregarded in that context is—what is also fascinating in this debate is completely disconnected from the current fiscal situation, and fiscal stance in Germany. Whether the structural deficit is increasing—I mean, right now we have these developments. Or there is a link, but there’s a fiscal stimulus, if you want. But it doesn’t really matter. You have this debate regardless of the facts, in a way.
Q: Sassan Ghahramani from SGH Macro Advisors.
Thank you very much, President Weidmann, for your talk. I have a question not on fiscal policy. My question is on monetary policy. (Laughter.) The Bundesbank has a very strict history of protection of the independence of central banks. And you talked about the issues with monetary financing. What are your thoughts about not just the restarting of the asset purchase program, the QE, but the messaging that this is open-ended in an environment where there are—in order to avert really crossing into those territories there are really two limitations that were set up. One is a 33 percent issue or limit financing, and the other is buying according to the capital key. And how is the ECB—first of all, what are your thoughts on that? And how it was communicated as open-ended? And how is the ECB going to cross that Rubicon when it really comes—hits those limits? Thank you very much.
WEIDMANN: I mean, just to make the bridge between your question and the one before, I fully subscribe to what you can read in the introductory statement, that, of course, there is a responsibility for governments to be prepared to cope with a potential downturn, and also to ensure stronger long-term growth rates. And monetary policy cannot fix those problems. And as your question illustrates, we also reach the limits of what we can do legally, of course, but also without jeopardizing our independence.
My problem with the sovereign bond purchases in the context of the European Union is the following: We don’t have that one federal safe asset that you have, and that your central bank buys. We have only debt of the nation-states, with very different credit ratings, very different risk characteristics. So to some extent, a purchase program in our context leads to suppressing those signals from the market which are, in my view, important for the monetary union to function, so that the finance ministers get to bear the consequences of their actions. And that’s one of the points. But even in a different context, you shouldn’t convey the impression that you’re doing monetary financing, and that’s then the point you were alluding to, that’s why certain quantitative thresholds are important.
I mean, the 33 percent limit that you mentioned has been derived from the collective action clauses in a sense, because if we hold in our portfolios a certain—a certain amount of bonds, or go beyond that threshold, then any debt restructuring would basically be precluded, because we cannot—because of the prohibition of monetary financing, we cannot tell governments, OK, we just—how you say—eliminated your debt in a debt restructuring. We would have to oppose any possible debt restructuring. And if you are the major holder of a debt title, then of course a debt restructuring is no longer possible. So that would undermine, again, one of the key pillars of the functioning of the monetary union.
And in more general terms, it’s, in my view, very important to—not to blur the boundaries between fiscal policy and monetary policy. We are already the biggest owner of government debt in the euro area. And this intertwines our balance sheet with the balance sheet of the governments, in quite—certainly in quite a substantial way. And could also—bears the risk of influencing our monetary policy debate. If you have a much more direct influence on what finance ministers have to pay on their debt by setting your target interest rates, then the discussion on you not to do what you have to do, or the pressure on you to do that, is of course much more—much more intense.
And that’s—I would say it’s important to respect those—we have introduced these limits to the PSPP as a decision of the governing council, which was, I would say, quite consensual, because of a common understanding. And I would say it’s very important to respect those limits to preserve our independence, to preserve the distance from monetary policy. But also not to run into legal issues. I mean, we have a couple of court cases in Germany before the constitutional court. And I don’t want them to rule that what we are doing is unconstitutional.
Q: Andrew Gundlach with Bleishroeder.
As a follow-on to that question, in theory the ECB and the Bundesbank have the ability to buy other securities, such as senior bank loans and equities, which has been achieved in Japan. If it’s so difficult to do the sovereigns, do you think, leaving aside the monetary policy, would the public support the expansion of that? And if they don’t, has monetary policy reached its limits in Europe? After all, just in the last six months the Fed has gone down fifty basis points. The ECB, only ten basis points.
WEIDMANN: No, I wouldn’t—I wouldn’t say that we have reached the limits, but I would say that, of course, the instruments have a very different cost/benefit perspective now, as we move on, in a sense. And your question illustrates that, of course, we can buy all sorts of things, but there are more and more problems that come with that. I mean, do you really want, as a supervisor, to be so intertwined with the banks that at the end of the day you are running into heavy conflicts of interest and the public might doubt your impartiality as a supervisor? And I would say that’s a heavy price to pay for some more stimulus.
So we have not reached our limits. And there’s a lot of creativity in our ranks. But we have to finely weigh cost and benefits of what we are doing. And there’s a good reason that we have formulated the strategy the way it is. We say that we want to achieve price stability and a certain definition in the medium term. And this grants us some leeway to react to circumstances where we might think that it takes longer to reach that target, where perhaps we are less confident that we will reach our target, and to explain that to the public. So that’s why we never quantified really what the medium-term in our strategic formulation means, because it doesn’t make sense in monetary policy.
We have so many transmission plans, with all different transmission legs, that you can’t say fifteen month, that’s it. But it varies from time to time. And after the crisis, good reasons to believe that it takes somehow longer. So I think the question is really whether you use with that leeway. And I would say that’s a leeway that comes from the formulation of the medium-term or from the definition of the medium-term more than from the definition of price stability or the inflation goal, so to speak. Or whether you want to say whatever it takes. I have ten basis point deviation, and I’ll throw everything at it to be there in fifteen months, in a sense. That’s with the philosophical discussion we are having. And if you want one extreme is the BIS view, that expresses a lot the financial stability side effects that such a policy can create. And the other view is whatever we need to achieve a further ten basis point of inflation, we will do it now, so it will be there in fifteen months or so. Now, that’s a caricature of both views, of course. And somehow gets—we are in between that.
LIPSKY: Unfortunately, we’re to the end of our time.
WEIDMANN: Oh, that’s a pity. I’ll have to come back. (Laughter.)
LIPSKY: Yes, we hope you will. There are bunches of questions I’d still like to explore, but thank you so much for your time. (Applause.)