Jens, Jörg, Paul and the future of central banking
The French are very good when it comes to stereotyping their neighboring nations. Then again France’s neighbors are equally adept at pigeonholing the Grande Nation. In this game one French metaphor describes the Germans particularly well: “querelle à l’allemande,” a German-type brawl.
The many German mercenaries, who soldiered for the French Kings and earned a reputation for quarrelsomeness, especially when inebriated, while doing so are one possible source of that stereotype. It may also stem from the fact that, contrary to France, an old centralized state, Germany until the 19th century consisted of a multitude of small fiefdoms that feuded among themselves.
A modern version of a querelle à l’allemande was fought last week before the German constitutional court in Karlsruhe. The court is deliberating whether the commitment made by European Central Bank (ECB) President Mario Draghi to do “whatever it takes” to preserve the euro (his comment referred specifically to the ECB’s outright monetary transactions (OMT) bond-buying program) is legal under German constitutional law.
The first thought that comes to mind is whether the German constitutional court has any jurisdiction whatsoever over an institution conceived to be both at a higher, supranational level and independent. Imagine for a second the Greek or Portuguese constitutional courts doing the same. German Finance Minister Wolfgang Schäuble, who testified during the hearings, stressed this paradox.
Even more astonishing were the interventions of Jörg Asmussen, German member of the board of directors of the ECB, and Jens Weidmann, president of the German Bundesbank, which is part of the European Central Banking System. The former defended the ECB’s policy and the latter challenged it. The clash here in fact was between two different views of what the mandate, role and goals of a central bank should be. Weidmann believes a central bank should limit its scope to defending price stability, and subordinate every other objective to that. Asmussen by contrast argued that overall financial market stability, and a guaranteed future for the euro, should take priority over price stability (which wouldn’t be maintained anyway if the Eurozone were to break up).
This debate must be seen in a broader, post-financial crisis context, one in which central banks have embarked on redefining their purpose. This soul searching ranges from a Bank of Japan willing to follow Japanese government orders through a Bank of England questioning whether it shouldn’t switch from the single objective of price stability to a dual mandate of price stability and low/lower unemployment to a Swiss National Bank bent on defending by any means possible the Swiss export industry, even at the risk of creating bubbles in the Swiss real estate market.
With politicians lacking the wits, will or power to make the necessary post-crisis changes, the mandates of central banks have been stretched to the max in many countries. However, monetary policy is not a panacea for every problem, as central banking legend Paul Volcker wisely reminded us in a recent speech1: “Asked to do too much – for instance to accommodate misguided fiscal policies, to deal with structural imbalances, or to square continuously the hypothetical circles of stability, growth and full employment – [the Fed] will inevitably fall short. If in the process of trying it loses sight of its basic responsibility for price stability, a matter which is within its range of influence, then those other goals will be beyond reach.”