Jens Weidmann, President of the Deutsche Bundesbank, has been warning of the consequences of an overly expansive monetary policy of the European Central Bank for years.
Mr. Weidmann, is inflation coming back as a result of Corona? According to the harmonized consumer price index, the rate of price increases in Germany in January from minus 0.7 to plus 1.6 percent.
Jens Weidmann: The inflation rate will continue to rise this year. In Germany the value added tax has been raised again to its old level. This affects the prices. Added to this is CO2 pricing, which also increases the inflation rate. What is disputed, however, is the effect of the forced abstinence from consumption after the pandemic in times of the Corona. Many citizens are currently unable to spend their money and are inevitably saving more.
What do people do with the money after Corona? Money stocking or hit the wall?
Weidmann: That is not yet clear. In any case, people won’t go out for dinner twice a day. But I can already imagine that many will then be driven out into the beer gardens and restaurants. They may even go out to eat more often than before for a while. Then it depends on whether the innkeepers raise prices or not. The same applies to travel, for example. However, private households with higher incomes in particular have probably built up savings. In these households, the share of financial resources that flow into consumption is usually lower than in others. And inflation rates will only really increase sustainably if wages rise too. That is a crucial factor. In any case, we keep a close eye on developments.
Dare to make an inflation forecast for Germany.
Weidmann: From today’s perspective, the inflation rate according to the Harmonized Consumer Price Index in Germany should be over three percent by the end of the year. That will only be temporary – I have already mentioned some special effects. But one thing is clear: the inflation rate will not remain as low as last year over the long term.
The European Central Bank in Frankfurt am Main.
Will the European Central Bank then stop its excessive monetary policy?
Weidmann: Monetary policy will tighten the reins if the price outlook requires it. At the moment, however, the aim is to combat the consequences of the pandemic. As a result, monetary policy has once again become more expansionary. But when inflation rates rise in the euro area, we will again discuss the basic direction of monetary policy.
How the corona pandemic could affect interest rate policy in the future
What are the consequences of the pandemic for the monetary and interest rate policy of the European Central Bank?
Weidmann: The ECB recently expanded its bond purchases by EUR 500 billion to EUR 1.85 trillion. As a result, monetary policy normalization was pushed back further. The phase of low interest rates will last longer. But in the Governing Council of which I am a member, there were different views on the right scope of the purchase program.
Do you sometimes dream that we will have decent interest rates in five years’ time and that you, as a brave admonisher in the euro round, have always stood up for it in the end?
Weidmann: I don’t know if it will help if I talk about my dreams.
Can’t you give German savers a glimmer of hope that interest rates will come back at some point, maybe in five or ten years?
Weidmann: We have been in a phase of low inflation rates and therefore very low interest rates for a long time, but I am convinced that this cannot be extrapolated at will. It is all the more important that the Governing Council of the ECB withdraws its very expansionary monetary policy in good time as soon as it is foreseeable that we will reach our target inflation rate. Then there must not be a lack of determination, even if the financing costs for highly indebted countries rise.
So what exactly has to happen after the corona pandemic?
Weidmann: The state finances in the euro area must be put in order after the crisis. After all, the national debt in the euro area as a whole now exceeds annual economic output. Monetary policy has to make it clear again and again that it is geared towards price stability and does not take into account the consequences that this has for the sustainability of national debt. This is important for the credibility of monetary policy and the trust of citizens in the Eurosystem.
Don’t you want to give the Swabian housewife and housewife hope that interest rates will finally rise?
Weidmann: But also the Swabian housewife and the Swabian housewife would have to have an interest in the pandemic that monetary policy supports the economy and the labor market. That benefits them too. And: We are not just savers. Those who take out a loan benefit from very low interest rates. Taxpayers benefit from the state’s favorable financing conditions. Ultimately, the Governing Council is not aiming for a specific interest rate level for savers. Our clear promise to the citizens of the euro area is that the value of their money will remain stable. That’s what I stand for.
How are we doing economically? The Prime Minister of Rhineland-Palatinate, Malu Dreyer, believes that “overall we got through the pandemic well”. Chancellor Angela Merkel is said to have said that the thing slipped away from us.
Weidmann: These are statements that above all require an epidemiological judgment. That is not my core competence as President of the Bundesbank. At the end of the day, it is also about comprehensive political considerations. If you ask me as a citizen, I can understand both statements. Of course the situation is grueling for all of us. Because the number of infections is still higher than hoped. The new virus variants make things even more difficult.
Economic outlook: The German economy is expected to grow by three percent
And what speaks for the more optimistic view of SPD politician Malu Dreyer?
Weidmann: That one shouldn’t ignore the successes that have been achieved: So far we have been able to prevent the health system from being overloaded, and there are now even several highly effective vaccines, although the vaccination unfortunately takes a long time. The fact that the economy as a whole has come through the crisis quite well so far, although individual areas have been hit very hard, also speaks for a more optimistic view.
So is the Bundesbank sticking to its economic outlook from December, according to which the German economy will grow by three percent this year? So is there any reason to be optimistic?
Weidmann: Forecasts are anything but easy at the moment. Because economic development depends crucially on the course of the pandemic and is accordingly uncertain. If the pandemic is increasingly brought under control in the course of the year and the containment measures can be thoroughly relaxed, the recovery of the German economy will continue. Therefore, our economists are currently of the opinion that we do not have to fundamentally revise our forecast from December.
Why are you so confident?
Weidmann: Our experts were already very cautious with this forecast. The industry has recently shown itself to be robust, which was also due to the global demand for German products. That is one reason why the German economy should not be set back too far in the current quarter. However, the first three months of this year will be worse than our forecast. Much now depends on how the pandemic develops and when containment measures can be eased.
When will we reach the pre-corona economic level again? Will it be that time in 2022?
Weidmann: According to our December forecast at the beginning of 2022. But once again: It is crucial that the pandemic is medically overcome in the course of this year.
To do this, however, people must also be vaccinated accordingly.
Weidmann: My impression is that the manufacturers are now doing everything they can to speed up production. So now other companies are involved in the production. All that can be done to accelerate and expand vaccine production is certainly money well spent.
The lack of digitization of the health authorities: a German weakness?
Should we have bought vaccines nationally instead of relying on Europe?
Weidmann: The basic idea of ordering together was certainly correct and a sensible reaction to conflict-prone national solo efforts that existed at the beginning of the pandemic, such as export bans on protective equipment. If mistakes were made in obtaining the vaccines, they must be worked through to learn from them. Heated debates about what could have worked better with the knowledge of today are not getting us any further now.
But the Chancellor herself is amazed at the German weaknesses in Corona times, such as the lack of digitization of the health authorities. Long before you joined the Bundesbank, you worked closely with Ms. Merkel as Head of the Economic and Financial Policy Department in the Federal Chancellery.
Weidmann: Before the pandemic, there was definitely no major public discussion about the equipment of our health departments. We are very good at analyzing the causes of a particular crisis and also at preventing such a crisis from happening again. But the problem is: every crisis is different. And the next crisis will probably come from a completely different corner. I worked in a department of the International Monetary Fund in the late 1990s. Models were developed there to predict financial crises. With each crisis, these models got better at explaining past crises. But that did not mean that we were in a position to reliably predict the next crisis. In any case, in summer 2020 we paid too little attention to what was coming in autumn. Finally, there was great relief that the first wave was over.
In the course of the corona crisis, criticism of our federal system is also being voiced, most recently from Axel Weber, your predecessor as head of the Bundesbank. Federalism is too inefficient in exceptional situations. What do you think?
Weidmann: I think a state shouldn’t be created just for exceptional situations. And just remember the first wave of the pandemic, in which Germany got off more lightly than many of our neighboring countries, including some with pronounced central power. At that time, the decentralized structure of Germany with its locally anchored health authorities or a broader network of laboratories was considered by many to be one of our strengths.
So federalism is ultimately better than centralism.
Weidmann: That’s too general for me. Both forms have their strengths and weaknesses. I find the discussion, which is sometimes conducted in a similar way, much more worrying as to whether, in the light of the pandemic, democracy – whether federal or centralized – is perhaps no better than an authoritarian regime. In view of democracies such as South Korea, Taiwan or New Zealand, which have kept the pandemic under control, and a large number of authoritarian regimes that did not succeed, I consider this hypothesis to be factually wrong. Furthermore, this comparison fails to recognize the value of a democracy, namely that the citizens determine the political direction and can also critically question decisions. I firmly believe that our open, democratic and market economy society is ultimately best for the wellbeing and prosperity of our citizens.
You have developed scenarios for forecasting crises. What crisis comes after Corona? Will we then slide straight into the next debt and euro crisis, starting in Italy?
Weidmann: The states have to reduce their indebtedness again after the pandemic. That is why we should look at how European fiscal rules can be made more effective. In Europe we have decided on a common monetary policy. But the states were not ready to give up their autonomy through the national budgets. This creates incentives for states to take on more debt. A high level of debt makes the monetary union vulnerable and could then put pressure on monetary policy to keep financing costs low.
What does that mean in concrete terms for the ECB?
Weidmann: In addition to the fiscal rules, the capital markets must also discipline public finances. The purchase of government bonds by the ECB must therefore not undermine market discipline.
Chancellery Minister Helge Braun has suggested the lifting of the debt brake and the necessary amendment to the Basic Law. Will one of the last dogmas of the CDU be shaken?
Weidmann: It is currently difficult to estimate the future need for consolidation after the end of the crisis because the uncertainty is simply too great. When discussing the when and how of the consolidation, however, it must not be forgotten that the debt brake helped us to establish a solid state finances in good times. As a result, the state is now financially capable of action where it is necessary. Germany did well with the debt brake.
But after Corona we are sitting on an immense mountain of debt.
Weidmann: Germany can bear this burden of debt. The debt ratio is still significantly lower than it was after the financial crisis. But yes, effective fiscal rules like the debt brake are important to reduce this debt burden after the crisis.
But it is completely unrealistic to meet the requirements of the debt brake in the next year. There would only be a tiny financial margin.
Weidmann: No, the consolidation can be stretched significantly with the existing reserves. The federal government has built up a reserve of almost 50 billion euros in recent years. Renewed exceptions will only have to be discussed if the pandemic lasts longer.
The way out of the corona debt burden: tax increases for Germans?
Do we have to shake the debt brake?
Weidmann: I don’t see it that way. Of course, one can discuss their specific design. However, the debt brake is an important fiscal guard rail. Nor do I consider them to be a brake on investment and growth.
Aren’t tax increases the logical way out of the enormous debt burden?
Weidmann: No. Again, I think the debt burden is sustainable. In the event of an economic recovery, for example, labor-market-related expenditures automatically decrease and tax revenues gush again. It was like that after the financial crisis. In addition, any budget gaps can also be closed through savings. And in view of the uncertainty among companies and consumers, debates about possibly unnecessary tax increases come at an inopportune time anyway.
Is there a threat of a wave of bankruptcies in Germany soon? Will this be a bankruptcy tsunami?
Weidmann: The economic slump will only be reflected in the insolvency figures in the coming quarters. They will increase significantly, but from a very low level. The number of corporate bankruptcies is likely to remain well below its historical high. The fact that the federal government supports the companies with many measures also contributes to this.
When Corona is over, don’t we have to quickly return to the market economy path? The state cannot support companies like TUI forever.
Weidmann: The crisis has shown how powerful market-driven solutions are. Think of the vaccines that several private companies have successfully developed in record time, or how quickly companies have switched to mask production. It was important that the state intervened massively during the crisis. But that must not become the normal state. I don’t think the state is a better entrepreneur.