Jens Weidmann: Pressing ahead - priorities for 2013
Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank, at the Deutsche
Börse Annual Reception, Eschborn, 21 January 2013.
* * *
1. Introduction
Dear Mr Faber,
Dear Mr Francioni,
ladies and gentlemen,
I am delighted to be invited to speak to you once again at Deutsche Börse's Annual
Reception.
First of all, I have some good news to impart: the end of the world, announced for the latter
part of December, proved not to be. Which is further demonstration of just how difficult
longterm forecasting is.
But now another disaster looms: a year with the number 13 in it. Whilst the number 12 is
associated with harmony and completeness, 13 has a harder time of it.
For many, the number spells disharmony and is a harbinger of misfortune. Many aeroplanes
have no 13th row, and floor 13 is frequently missed out in high-rise buildings in the United
States. However, it may interest you to know that the Deutsche Bundesbank's Executive
Board meetings are held on the 13th floor. Superstition about numbers appears to have
passed us by.
And that is just as it should be, because central bankers do well to maintain a rational
relationship with numbers. Figures, data, statistics, balance sheets and the like are our daily
bread.
That applies to central bankers just as it does to stock exchange traders and other financial
market experts. What we also have in common is that we are interested both in the figures
that describe past economic events and in those which enable us to glimpse into the future.
Although forecasts and expectations are by their very nature uncertain, they nonetheless
provide a basis for important decisions
"Not only do expectations about policy matter, but (...) very little else matters."
These words about monetary policy from macroeconomist Michael Woodford point up the
importance of expectations in the economy.
And ultimately these expectations come to be traded on the stock exchange. Deutsche
Börse's Annual Reception is therefore a perfect occasion to review the past year and then to
take a look at expectations for the new year.
Let me begin with our host: for Deutsche Börse AG, 2012 was an eventful and not entirely
harmonious year. With the plans to merge with NYSE Euronext having come to nothing,
Deutsche Börse now needs to focus on growing organically. But I believe that the conditions
are favourable for achieving growth under your own steam, and that Deutsche Börse is well
positioned in the marketplace.
Deutsche Börse is of central importance to Germany as a financial location. A highly
developed economy like Germany's, with its innovative and internationally successful
companies, needs a broad range of top-quality financial services if it is to continue to achieve
sustained growth. Deutsche Börse makes a decisive contribution to ensuring this is the case.
The German financial system has also been spared excessive behaviour of a home-made
nature. This is a very good environment for a major financial location - and for Deutsche
Börse.
It must be added, of course, that the financial crisis has laid bare weaknesses in the financial
system and in regulation which need to be rectified, and which are currently in the process of
being rectified.
The purpose of the reforms is not to strangle the financial system but to render it more
stable. To achieve this, the risks in the system have to be made more transparent, and these
risks need to be borne by those that entered into them.
These are key prerequisites for ensuring that excessive risks are not taken on board and that
the financial system can properly fulfil its essential economic functions.
The stock exchanges, as organised trading venues, have a central role to play in these
reform efforts. They ensure transparency, efficiency, reliability and market liquidity.
The way in which modern regulatory standards have been swiftly implemented, making stock
market trading even more robust and stable, provides Germany with a key advantage as a
financial location. Deutsche Börse has established a very sound position for itself in this
respect, including in relation to the hot topic of high-frequency trading. It is able to offer a
trading infrastructure which is modern and reliable - think of circuit breakers - and it already
meets most of the forthcoming requirements.
2. 2012 - review of an eventful year
Deutsche Börse were not the only people for whom 2012 was an eventful year. The debt and
financial crisis continued to prevail. Allow me to cast a roving spotlight over some of the key
events and decisions in the crisis, just to remind you.
•
Potentially unlimited bond buying was announced, a monetary policy move which
surprised the financial markets and has so far brought greater calm to these
markets.
•
Banking union was decided on in principle, with a single supervisory mechanism at
the ECB.
•
Collective action clauses will be attached to all government bonds issued in the euro
area from the beginning of this year.
•
Three-year tenders led to an unparalleled expansion in central bank liquidity.
•
The ESM was established as a permanent provider of assistance.
•
The fiscal compact, aimed at strengthening budgetary discipline in the monetary
union, was ratified in 2012.
•
Greece, where the sovereign debt crisis began, received a second rescue package
in February, which had to be untied and modified in the autumn.
Mention should also be made of the island state of Cyprus: it requested financial assistance
shortly after Spain did, and is currently still negotiating the details.
Thus, 2012 was indeed a highly eventful year. Some now believe the depths of the crisis are
behind us. Whatever the case, we still have a long way to go: many of the measures I have
just mentioned will not rectify the causes of the crisis. The measures are aimed at dealing
with the symptoms, and may create new problems of their own.
So let us now look forward, to 2013. What should we expect, what it is reasonable to
anticipate, what should we seek to achieve?
3. Economic situation and outlook
Germany's economy has made a weak start to the new year. Gross domestic product (GDP)
appears to have contracted appreciably in the final quarter of 2012, and the economy is likely
to be listless in the current quarter too. This is attributable not least to the crisis in the euro
area and the uncertainty it is generating.
Nevertheless, there is a realistic prospect that this phase of weaker momentum will not
persist for all that long and that it represents no more than a blip. As a result of the
sluggishness experienced in the last quarter of 2012 and the first quarter of 2013, our
projection puts average GDP growth for the year at "just" 0.4%.
However, this paints somewhat too gloomy a picture of the economy, which is likely to pick
up appreciably as the year progresses, achieving a year-on-year rate - ie the difference
between the final quarters of 2012 and 2013 - of 1.1%.
Overall, then, one might say that, although the economic outlook is modest, it is in no way a
poor one, despite the prevailing uncertainty. The German economy remains in good shape.
4. Economic policy challenges in the new year
In order to be able to say the same thing for the euro area as a whole, we need to make
decisive progress in tackling the financial and sovereign debt crisis in 2013.
The financial crisis has been upon us for more than five years now, and the sovereign debt
crisis for three years. Many people are weary of the crisis and would rather not hear about it.
This crisis fatigue narrows people's focus so that they are concerned only with smoothing the
waters in the short term. But we all know from our own experience that problems have a
habit of not going away until the root causes are dealt with.
Of course, a lot has already been achieved, and I would not wish to downplay these
achievements. Significant progress has been made, for instance, in regulatory reform at an
international level - think Basel III.
Global current account imbalances have shrunk noticeably since their high point in 2007.
And there has also been some improvement in the crisis-hit countries of the euro area:
current account and budget deficits have fallen, competitiveness has improved, and work has
been done on important structural reforms.
I have already mentioned some of the progress achieved in the euro-area framework, such
as the fiscal compact and the agreement on banking union.
However, these advances represent milestones en route, rather than the final destination.
There remains plenty to do, in all the areas I have just mentioned.
4.1 Regulation
On the question of regulation, I would like to highlight three areas as examples of where we
now need to move forward. First, the new Basel III capital requirements. These should now
be transposed into national law worldwide, including in the United States.
Second, in Germany as elsewhere, we need to make further improvements to the
arrangements for shielding deposit-taking credit institutions from the risks of speculative
proprietary trading and high-risk lending.
This involves more than just tighter capital rules. A requirement to establish trading units
which are legally, organisationally and economically independent can help protect
deposittakers, while at the same time allowing the advantages of Germany's universal banking
system to be retained. Indeed, there is no call to forfeit these advantages, since banking
systems with fully segregated functions did not prove to be in any way superior in the
financial crisis.
Care must then be taken in defining the lines of business which need to be set apart.
Customer-driven business and hedging transactions should not be included, and de minimis
limits will ensure that small deposit-takers can also undertake proprietary trading and
derivatives transactions to an appropriate extent.
A third area where progress needs to be made on the regulatory front is high-frequency
trading. The Bundesbank expressly welcomes the objectives of the relevant draft legislation.
Computer-based high-frequency trading can enhance the efficiency of financial markets, for
example by increasing market liquidity. Equally, though, high-frequency trading is susceptible
to error and brings certain dangers with it.
The plans to improve transparency through expanded information requirements are therefore
appropriate. The installation of a "kill switch" would be advisable, to enable erroneous or
market-damaging algorithms to be deactivated.
And it is to be hoped that Germany's proposed legislation will serve to speed up the work at
EU level on revising the Markets in Financial Instruments Directive.
4.2 Budget consolidation and structural reforms
Among the economic policy tasks for 2013, I include pressing ahead with structural reforms
and budget consolidation. These are challenges not just in the euro area.
You were no doubt also relieved that US policymakers were able to thrash out a deal
between New Year's Eve and New Year's Day to prevent, initially, the US economy from
falling off the edge of the fiscal cliff.
Nevertheless, that compromise still falls short of a long-term solution to the existing fiscal
problems. The necessary raising of the US debt level and the spending cuts that have only
been deferred could very soon lead to the next face-off. What is required here is acting more
resolutely in the general interest, as the Europeans are regularly called on to do.
Instead of that, thoughts and minds were focused on the suggestion - which some even
meant seriously - that the US government should simply exploit a legal loophole and mint a
platinum coin with a face value of one trillion US dollars and then pay this in at the Federal
Reserve in order to acquire the money needed to cover current expenditure.
The apparent aim of this proposal was to lever out the debt ceiling, but ultimately it amounts
to solving debt problems by means of money creation.
It now seems that this suggestion is no longer up for discussion, but I am still amazed to see
onto what strange paths and byways unbridled pragmatism can lead when applied to crisis
management.
In the final analysis, there is no smooth, straightforward and quick way out, either in the
United States or in Europe. The processes of adjustment in putting public finances and
economic structures in order again are not going to take a matter of months or a few years.
The losses of competitiveness in the countries in crisis, for example, were also built up over
a decade. A great deal of perseverance will be required to make good those losses.
Debt reduction by governments, enterprises and households will also be an arduous
process. In the case of sovereign debt, that process has not yet even really begun as only
less new debt is being taken up initially.
It is obvious that, in many countries, pre-crisis growth rates will not be matched any time
soon.
4.3 Framework of monetary union and banking union
Nor has the journey's end been reached with regard to a new, consistent framework for
European monetary union. Moreover, so far there is still no consensus on what the final
destination should be. To put a positive spin on it, there are a number of a diverse spirited
opinions on the subject. A somewhat less positive take would be that national interests are
plain to see, while the goal of a stable and functioning monetary union is sometimes lost from
view.
The future architecture of monetary union therefore remains unclear. Progress is
nevertheless being made in one specific but important area - the financial market
architecture with the project of a European banking union.
Properly designed, the banking union will strengthen financial stability in the euro area. It will
then close up an unguarded flank of monetary union, thus helping to safeguard it as a union
of stability. For that reason, the Bundesbank emphatically supports this project.
The creation of a banking union is a case of major institutional work in progress and is, in
essence, a matter of much the same complexity as setting up a monetary union. And even if
it will certainly take less than the whole decade needed for EMU, it is a project that must not
be rushed. It is too important for that. Nor should it create any new conflicts of interest which
divert monetary policy from its primary objective of safeguarding price stability.
Nevertheless, the easing in the financial markets must not dampen the zeal for reform in this
area. Our guiding principle should be to act "as quickly as due caution allows".
A banking union entails not only a joint supervisory mechanism operating in accordance with
the strictest uniform rules and standards possible. A resolution and restructuring mechanism,
too, has to be an integral part of a banking union. A few days ago, Commission President
Barroso rightly described this intention as a matter of the highest priority.
Such a mechanism should ensure that, in the event of a bank encountering difficulties, it is,
first and foremost, the owners and creditors who are liable for their investment decisions,
followed by a fund supported by the banks, and only then - in exceptional cases - the
taxpayer, with mutualised liability being possible only in the case of jointly supervised
institutions.
The banking union additionally requires regulatory underpinning. Besides a generally better
backing of risk positions with capital, as had already been decided in the case of Basel III,
the risk arising from claims on the government also has to be backed with capital, at least in
the medium term. This is the only effective way to break the vicious circle of tottering banks
and teetering governments instead of merely shifting it to the European level by mutualising
liability.
We must not forget that the banking union is a project that is geared to the future. It cannot
solve the current crisis and is not intended to clear up its legacy burdens. Rather, its purpose
is, above all, to make the European financial system and thus the monetary union
permanently more resilient to new adverse developments and crises.
If this succeeds, the banking union will protect the single monetary policy, the member states
and their taxpayers alike.
5. Central bank independence at risk
Transferring responsibility for banking supervision to the ECB nevertheless fits in well with an
impression that is becoming increasingly difficult to shake off outside the euro area as well.
Central banks are having more and more responsibility thrust on them, even for tasks which
lie outside their core mandate.
My colleague James Bullard of the St. Louis Fed (at the Annual Meeting of the American
Economic Association) recently bemoaned the fact that a creeping politicisation of central
banks has been taking place worldwide in the wake of the financial crisis. One medium-term
implication of this development might also be that price stability, as the main objective of
monetary policy, is increasingly called into question with independent central banks going out
of fashion.
Stephen King, chief economist at HSBC, is perhaps right in predicting that "The era of
independent central banks is coming to an end."
Even now, some worrying encroachments can be observed, say, in Hungary or in Japan,
where the new government is involving itself massively in the affairs of the central bank,
making forceful calls for an (even more) aggressive monetary policy and threatening an end
to central bank autonomy.
One consequence, whether intentional or not, might also be an increasing politicisation of the
exchange rate. So far, the international monetary system has come through the crisis without
competitive devaluations and I hope very much that things stay like that.
Now, in Japan of all places there may be more obvious problems than inflation and a weak
currency. It is not without good reason, however, that central banks have been given
independence and a narrow mandate. This was a lesson of the 1970s and early 1980s - a
time when many countries had high inflation rates, sometimes in double digits.
In the United States, this era is called the "great inflation", which was followed in the
mid1980s by the "great moderation", a period of moderate inflation rates and dampened
economic cycles. And, then, along with the "great financial crisis" came the "great recession".
"Great" is a famously popular, not to say overused adjective on the other side of the Atlantic.
The experience of the great inflation was, in any event, that independent central banks with a
narrow, credible mandate enjoyed greater success in combating inflation.
As a result, many central banks worldwide were given independence in the 1980s and
1990s. When the Bank of England was granted independence in 1997, Gordon Brown, then
Chancellor of the Exchequer, said "The previous arrangements for monetary policy were too
short-termist, encouraging short but unsustainable booms and higher inflation, followed
inevitably by recession."
The depoliticisation of money and central banks' stability orientation undoubtedly made a key
contribution to the great moderation.
The decline in inflation during this period was, admittedly, also assisted by other
developments, such as globalisation. To that extent, the great moderation can be seen as
halcyon days for monetary policy.
Since the outbreak of the crisis, the environment has become noticeably less favourable for
central bankers. The growing demand for energy and raw materials on the part of the
up-and-coming economies has tended to make the inflation-dampening impact of
globalisation flip over into rising pressure on prices.
In the wake of the financial, economic and sovereign debt crisis, central banks are being
urged to take measures to support the financial system, stimulate economic activity, reduce
government funding costs and even safeguard government solvency.
Overburdening central banks with tasks and expectations, however, is certainly not the right
way to achieve a lasting solution to the crisis. The central banks, in turn, will best protect their
independence by adopting a narrow interpretation of their mandate.
In summary, it can be said that "Today most central banks are independent, headed by
nonelected officials, and quite powerful. This set-up is acceptable only if independence is limited
by the mandate. That's the framework the legislators have given us [...]. That is why we are
so keen about respecting the mandate, because that's the true guarantee of our
independence, which [...] is crucial for our credibility. And credibility is essential for delivering
price stability."
Those words are not mine, by the way, but come from a recent interview with Mario Draghi,
who put the point most succinctly.
6. What matters now
The key to resolving the crisis therefore does not lie with the central banks.
Rather, permanently overcoming the crisis will now be a matter of rapidly implementing the
regulatory reforms that have already been agreed in principle - above all Basel III - and
governments implementing budget consolidation and the necessary structural reforms in a
controlled, creative but consistent manner - and not just in Europe. Similarly, it will be
important to put in place a coherent framework for the monetary union - a framework in
which, despite the communitisation of risks, liability and control are not thrown out of kilter -
with everything based on the Maastricht principles as long as there are no majorities for a
genuine fiscal union. In this connection, too, the banking union should be designed in such a
way that it really does become a primary pillar of a stability union.
This year will probably not mark the end of the crisis. As I have already said, the processes
of adjustment will take time. But decisive steps can be taken in 2013 to overcome the crisis
on a lasting basis.
Of course, I said the same thing at the last annual opening with regard to 2012. Still, that is
not my own personal mantra, but rather a reminder that there is no more time to spare.
Those steps being now taken, however, would be good news for us all, not least for Frankfurt
as a financial centre and for Deutsche Börse.
For all of us, I want to see these steps being implemented and, with that in mind, I wish you
all the best in the new year.