Andreas Dombret: Remarks on current developments in Europe
Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the Reception of the Bundesbank Representative Office, New York,
1 November 2012.
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Introduction
Dear Governor Dudley
Ladies and Gentlemen
It is a pleasure for me to be here with you today in New York and to welcome you all. Due to
"Sandy" it was not easy for me to get over to New York, but I can imagine it was much more
uncomfortable for all of you staying in the area over the last couple of days. And please let
me express my deepest sympathies for the hardships New Yorkers are facing right now.
Bill Dudley will speak to you in a couple of minutes about cooperation between central banks.
In the long tradition of this cooperation, trust and mutual understanding have been
established among central banks worldwide. And Joerg Stephan, the Head of our
Representative Office, has already mentioned the history of the cooperation between our two
central banks. I am proud of this history, and we are committed to upholding it with the same
degree of trust and mutual understanding in the future.
I will come back to this later. Before doing so I would like to make a few brief remarks on
developments in Europe.
Remarks on current developments in Europe
From abroad, I must admit that developments in Europe are hard to follow and may well
appear complicated. This can result in risks being overstated and the progress already made
being neglected. As regards the European Monetary Union, significant steps in the right
direction have been taken to overcome the crisis. In this context I will briefly comment on
three topics tonight.
First, adjustments in the periphery countries are unavoidable, but they are under way. For
example, wage moderation has gained some momentum, exports in some of the crisis
countries have been rising, and current account as well as budget deficits are shrinking.
My favourite example is Ireland, which shows that trust can be regained if the agreed
measures are adopted and implemented.
As concerns the specific case of Greece, we are way behind the programme goals due to the
standstill in consolidation and basic structural reforms in this member state. Politicians and
the EU are willing to assist Greece, but Greece must, first and foremost, help itself.
Announcing and passing laws is not enough if the administration and the general public
undermine them. It is now the task of the Troika to decide impartially whether Greece meets
the conditions for further assistance.
I will be brief but positive about my second point: the need for changes in the framework.
Last Sunday, ECB President Draghi stated that mutual consensus about the need to transfer
some fiscal sovereignty to the European level is growing. So we can look forward to the
outcome of his report on the future of the EU framework, which will be presented and
discussed at the next EU Council meeting in mid-December.
Finally, the public debate in Europe recently focused on the topic of a "banking union", i.e. a
single European supervisory mechanism. A banking union can very well be a major step
towards breaking the link between banks and sovereigns - but by harnessing the disciplinary
forces of the market, not by doing away with them.
In order to minimise the risk that bank rescues pose to government finances, creditors have
to be the first in line when it comes to bearing banks' losses. Taxpayers' money can only be
the last resort. With regard to spillovers from sovereigns to banks, sovereign-bonds need to
be adequately risk-weighted to strengthen market signals and improve resilience in case of
market turmoil. In addition, there should be caps on banks' maximum exposure to individual
sovereign creditors, as is already the case with private creditors.
In summary, I wish to remind you that we need both short-term crisis management as well as
long-term structural adjustments and reforms, as structural problems and "macroeconomic
imbalances" did not appear overnight. Similarly, reforms will not achieve their desired effects
all at once, but the time bought by short-term crisis management measures must be used
wisely.
Remarks on German gold reserves
Please let me also comment on the bizarre public discussion we are currently facing in
Germany on the safety of our gold deposits outside Germany - a discussion which is driven
by irrational fears.
In this context, I wish to warn against voluntarily adding fuel to the general sense of
uncertainty among the German public in times like these by conducting a "phantom debate"
on the safety of our gold reserves.
The arguments raised are not really convincing. And I am glad that this is common sense for
most Germans. Following the statement by the President of the Federal Court of Auditors in
Germany, the discussion is now likely to come to an end - and it should do so before it
causes harm to the excellent relationship between the Bundesbank and the US Fed.
Let's get back to facts and figures: I would like to remind you that our gold reserves are part
of the German currency reserves. These were accumulated over time thanks, in part, to
Germany's economic boom in the 1950s and 1960s. Germany's growing economic strength,
especially its strong external position, resulted in rather large trade account surpluses, most
of them acquired in US dollars. At that time, the International Monetary System, known as
the Bretton Woods System, was dominated by the US currency. As long as this system was
in force, which was up until 1971, the US Fed was obliged to exchange its currency for gold.
Any current account surplus thus resulted in an increase in Germany's gold reserves. This
gold was stored in US vaults for obvious reasons. This was not only the case for the gold
hold by the Bundesbank - it was, in fact, common practice. By the way: it was the only
practical thing to do, since running a trade account deficit meant a decrease in gold stocks.
Thus, we are now looking back at sixty years not only of fruitful cooperation in many fields
and international fora, but also of storing gold and trading via the New York Fed. As a matter
of fact, it is sensible for us to do so in New York, as Frankfurt is not a gold trading venue.
Throughout these sixty years, we have never encountered the slightest problem, let alone
had any doubts concerning the credibility of the Fed. And for this, Bill, I would like to thank
you personally. I am also grateful for your uncomplicated cooperation in so many matters.
The Bundesbank will remain the Fed's trusted partner in future, and we will continue to take
advantage of the Fed's services by storing some of our currency reserves as gold in New
York.
At the same time, you can be assured that we are confident that our gold is in safe hands
with you. The days in which Hollywood Germans such as Gerd Fröbe, better known as
Goldfinger, and East German terrorist Simon Gruber, masterminded gold heists in US vaults
are long gone. Nobody can seriously imagine scenarios like these, which are reminiscent of
a James Bond movie with Goldfinger playing the role of a US Fed accounting clerk.
While gold is important, we have to combat a crisis of confidence in the euro area. This is the
task we need to concentrate on. And we will do so.
Thank you for your attention.