What the Bundesbank Can Teach the ECB About Winning Public Respectby
German central bank was founded in 1957 amid political attacks
Independence and price stability among values passed on to ECB
As the Bundesbank turns 60 this year, it might have a message for the teenage European Central Bank: we’ve been there before.
While the two Frankfurt-based institutions haven’t always seen eye-to-eye, the ties between them run deep. The ECB was deliberately infused with the spirit, and some of the staff, of the German central bank when it was created 19 years ago. Moreover, many of the challenges the ECB faces are reminiscent of episodes in German monetary history -- a point often overlooked as Europe’s largest economy leads criticism of its currency guardian.
In theory, the Bundesbank president has no more say over interest rates and other measures than anyone else on the ECB’s 25-member Governing Council, and a rotation system means Jens Weidmann won’t even have a vote at the next meeting on Thursday. In practice, the institution’s size makes it critical for policy implementation and maintenance of the euro area’s financial plumbing. And then there’s its public credibility, something the ECB has lately struggled to sustain.
“Reputation, respectability, and expertise in keeping prices stable are really what make the Bundesbank different from all the other central banks in Europe,” said Emmanuel Mourlon-Druol, professor of economic history at the University of Glasgow. “Being successful in fighting inflation was really the obsession of the Bundesbank, with the German citizens backing it. As a consequence, that became a priority in the design of the ECB.”
“A stable currency is not self-evident,” Weidmann said in the foreword of a book on the institution’s history published Monday. “Therefore, the euro is tied to the promise to secure the currency union as a stability union.”
One of the key and most vehemently protected principles of the Bundesbank, which will mark its anniversary with events this year, is its independence in the face of political criticism that central-bank watchers today might recognize. The act creating it was passed by the German parliament in 1957, a year after then-Chancellor Konrad Adenauer attacked its predecessor for failing to think politically and being the “guillotine of ordinary citizens.”
His criticism that the Bank deutscher Laender -- the Bank of German States -- was choking off growth by raising interest rates backfired. Germans, seeking a stable currency after the Reichsbank twice destroyed the Mark, sided with the technocrats and central-bank autonomy was enshrined in law.
Over the years, the Bundesbank had to defend its independence several times, including when then-President Hans Tietmeyer publicly dismissed the government’s undercover request in 1997 to revalue the country’s gold reserves and help cover a budget shortfall.
Protection from political interference is closely linked to the pursuit of price stability, a keenly valued mandate in Germany after hyperinflation scarred the country in the 1920s. The Bundesbank’s first big test came in the 1970s after an oil-price shock and the collapse of the Bretton Woods system of fixed exchange rates among major economies. Price growth shot up to more than 7 percent, a surge reined in relatively quickly by higher interest rates and a reduction in money supply.
In 1974, the Bundesbank and Swiss National Bank became the first central banks in the world to introduce a monetary target. Others followed suit, and the ECB acknowledged in a working paper that the innovation helped earned the Bundesbank a reputation as one of the most successful central banks in the second half of the 20th century.
Former European Commission president Jacques Delors remarked in 1992 that “not all Germans believe in God, but they all believe in the Bundesbank.”
The Bundesbank’s leading role in Europe did come at a cost to central banks of other nations, notably the French one, which was forced to keep monetary policy tighter than desired in the 1980s to prevent devaluations of its currency.
“A European central bank was thought to give France an equal chance to influence monetary policy,” said Charles Goodhart, a professor at the London School of Economics. “The clear loser in all that was going to be the Bundesbank. In order to get a German agreement to the establishment of the ECB, the ECB had to be constructed pretty much along Bundesbank lines.”
In 1999, Germany ceded currency control to the ECB, which has had to deal with crises including a plunging exchange rate, the threat of deflation and the potential break-up of the euro. The period has also been marked by repeated disagreements with German policy makers -- in particular over bond-buying plans that triggered the resignation of two German central bankers and drew criticism from others, including Weidmann.
The irony is that the Bundesbank has been there as well. It has used bond-purchase programs several times, spending 1.3 billion deutsche marks on sovereign bonds in 1967 and about 7.5 billion deutsche marks in 1975. Concern that the purchases could be seen as illegal monetary financing -- another running criticism of the ECB -- ended the 1975 program after only four months.
The rise of the ECB has meant a down-scaling for its German forerunner. The Bundesbank today has 9,600 employees, compared with 16,500 in 1991. And another major transition is about to start: a makeover.
On the eve of its 60th birthday, Bundesbank officials decided on the gift they will give the institution for its 70th anniversary with an upgrade of its concrete citadel -- constructed in the avant-garde Brutalist style of the 1960s -- to preserve the structure and what it stands for for the future.
“The Bundesbank’s building is part of the economic history of Germany,” Johannes Beermann, the Bundesbank board member in charge of the project, told reporters on Friday. “We’d do well to keep its image in tact.”
The same could be said for the resilience of Germany’s most-respected institution, as the ECB’s first president, Wim Duisenberg, noted.
“The Bundesbank is like whipped cream,” he mused in 1996. “The harder you beat it, the stiffer it gets.”