Jens Weidmann: We are not lemmings

The president of the Bundesbank Jens Weidmann came to Amsterdam on invitation by the president of the Dutch Central Bank Klaas Knot. The German Institute (DIA) of the University of Amsterdam organised a small conference where they presented their views and answered some questions from the audience. We can find Weidmann’s speech at the Bundesbank website.

Weidmann recalled that Amsterdam had been built on piles (poles) and then jumped to monetary stability: “But I am positive that if we learn from the sovereign debt crisis and do not falter in our efforts to push enough piles into the right parts of that tricky ground, the European monetary union can be preserved as a place of stability that is worth living in.”

A key point is that the ECB statute is targetted at controlling inflation. In the onslaught of the crisis since 2007 the ECB got an additional role in maintaining financial stability and preventing collapse, like with the supervision of the European Banking System (see the alphabet soup), but the Bundesbank considers it advisable that the ECB returns to its original role for stable money. A new Treaty is required, with a rejuvenated ECB and a new authority for monitoring the financial sector.

Thus, in a curious way, Weidmann suggested that he was irrelevant to talk to. Just let the ECB / Bundesbank manage inflation, forget about their existence, and talk to other people when you want to discuss financial stability. Having said this, didn’t stop Weidmann however in making his comments on monetary and financial stability.

A key point is that Basel III would need to be revised. Government debt is handled in the regulatory framework as risk free while the markets assign risks. See this report by Bloomberg 2011, when it was already an old issue. This weblog reported in 2012 about the visit of professor Bofinger to Amsterdam, who rejected that government debt could default since that would be some kind of bailout. Apparently there is little enthousiasm amongst regulators for amending Basel III, in particular amongst most countries other than Germany and Holland who would lose their risk free status. Weidmann turned on the screws however. He mentioned France as a “core country” that fails in its structural reforms and ought to suffer the consequences. In my impression Basel, Bofinger en Weidmann are stuck in a logical conundrum. I refer to my earlier paper for a solution approach Conditions for turning the ex ante risk premium into an ex post redemption for EU government debt.

Naturally the juridical status of the OMT came up, as it also was mentioned in an earlier weblog entry here. A professor from Leiden asked Weidmann whether he hadn’t put the authority of both the Bundesbank and the Bundesverfassungsgericht at stake, by voting against the OMT and publicly speaking out against it. “We are not lemmings,” Weidmann answered. In terms of their fear for inflation Germans actually are like lemmings, but obviously he has a good point that Germany shouldn’t be asked to pay for what other nations squander, and obviously OMT is a curious construct while there are much better approaches, see my Economic Plan for Europe and paper Money as gold versus money as water.

The joker of the afternoon came in the person of former EU commissioner Frits Bolkestein. He wondered whether Southern Europe should not take a vacation from the Euro, return to their original currencies, re-establish competitiveness, get some help in doing so, and then apply for the Euro again. He glossed over a question like how to handle the debt that is denominated in Euro’s. Weidmann and Knot remained polite and gave the obvious answers. A monetary union exists by stability and not a revolving door. Financial markets would sniff out potential departures and the speculations would force them. Bolkestein’s idyllic vacation is a recipe for economic chaos.

Bolkestein about a Southern European Vacation

Bolkestein (below right) asks about a Southern European Vacation from the Euro

PM. A Dutch report by DIA is here. The text by Klaas Knot is here.  Here is an interview with Weidmann on Dutch national television – in German with Dutch titles. The closing statement by Weidmann is that we can already see the light at the end of the tunnel. In my analysis he can only point to a small air vent that also leaks some light. We will not suffocate before we die from starvation.

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