Jens Weidmann: Hans Möller medal acceptance speech
Speech by Dr Jens Weidmann, President of the Deutsche Bundesbank and Chairman of the
Board of Directors of the Bank for International Settlements, at the annual meeting of the
Munich Volkswirte Alumni-Club, Munich, 1 July 2016.
* * *
Dear Mr Baader
Ladies and gentlemen
First of all, I would like to echo the words of welcome offered by our host and likewise
welcome you to the Bundesbank's Regional Office in Bavaria.
The fact that you are holding your annual meeting here at the Bundesbank for the third time
now after doing so in both 2012 and 2013 is a clear sign that you feel very much at home
with us. But as you know, we do offer you a suitable venue and I can assure you, Mr Baader,
that you didn't have to present me with this award to be able to hold your meeting here
again.
Nevertheless, I am of course delighted to receive the Hans Möller medal and I would like to
express my sincere gratitude for this honour.
You outlined the reasons for your choice just now, and I value them as support for my efforts
to broaden my audience beyond narrow circles of relevant experts when discussing issues of
European integration and monetary policy. I also feel encouraged to continue promoting a
stability-oriented monetary union.
The fact that a club of economists is recognising my efforts to make economic issues
accessible to a wider public is very fitting given the words of Hans-Werner Sinn in his
farewell lecture - namely that economists must, first and foremost, serve the people.
Monetary policy and economic education
But I'm not just an economist - I'm also a central banker. In this capacity, I have a special
interest in communicating with audiences beyond industry professionals.
This is because the successful functioning of any central bank hinges heavily on the support
of the general public. Or, as Otmar Issing put it, "Ultimately, every society has the inflation
rate that it wants and deserves."
It is without a doubt easier to implement a stability-oriented monetary policy when the
general public holds monetary stability in high regard. What's more, the stronger the public's
support for a central bank's stability-oriented stance and the greater the confidence it enjoys,
the greater its level of independence becomes.
Appreciation of monetary stability is, of course, not to be confused with detailed knowledge of
the mechanisms of monetary policy, although there is evidence to suggest that a person's
appreciation increases in parallel with the knowledge he or she has about the way in which
these two factors interact.
A number of studies indicate that economic education has - to put it diplomatically - some
room for improvement. The Bundesbank has therefore expanded its economic education
programmes in recent years.
By using educational materials and organising various types of events, we want to improve to
the best of our ability the general public's understanding of monetary and foreign exchange
policy issues. For example, our Regional Offices provide teacher training, visit school groups
and organise public lectures under the motto "Forum Bundesbank". The feedback that we
have received on these initiatives has been very positive.
I myself meet once a year with teachers and once with pupils. Time and time again, I see
when young people visit the Bundesbank that they are very interested in our work and ask
intelligent questions.
We should, of course, be aware that the impact that such measures can have is limited in
terms of both breadth and depth. Such was the account recently given by the senior
business editor of the Frankfurter Allgemeine Zeitung concerning her own offspring: "It is a
positive thing that [the Bundesbank] goes into schools to raise awareness about monetary
stability and to provide insights into the secrets of interest rate policy. It really is never too
early to start tackling such topics in times such as these. However, it should be under no
illusions as to the success of its efforts. My child took precisely one term away from the talk
given by a Bundesbank representative to a year 12 class: marginal lending facility."
Incidentally, this technical term is even on the sixth form curriculum in Bavaria. That being
said, it is also clear that the jargon that we have become accustomed to as central bankers
should not detract from the essentials.
The principle of liability as a guide
But it is not just vocabulary that detracts from the essentials. Nowadays, economists'
reasoning is highly mathematical and model-oriented, which often makes it difficult for
noneconomists to comprehend. However, institutional rules and regulations have also become
so complex nowadays that often only a few experts are able to fully understand them.
Consider the federal financial equalisation system, for example. Addressing this subject,
Peer Steinbrück once said, "There are only three people that really understood this concept.
The first is dead. The second is in a mental asylum. The third is me - and I've forgotten
everything."
Another example is the Stability and Growth Pact. With respect to the annual budget deficit
ceiling, the old saying was, "3% is 3%." In the meantime, however, there are now federal
states that have been flouting the deficit rule for seven years - and have been able to call
upon the exceptional circumstances approved by the European Commission.
These days, even the experts are hard-pressed to judge whether fiscal rules are being
observed or broken. The general public has long since bowed out of this discussion ...
But what members of the public certainly do understand are the basic principles of the
market economy as taught to them by their own life experience.
Take the principle of individual responsibility, for instance. As Walter Eucken once put it,
"Those who reap the benefits must also bear the costs." Conversely, however, the principle
of liability also means that those who are liable for losses must also be those who, based on
their decisions, are responsible for said losses.
To illustrate what this means, I always like to draw the following comparison for my audience.
Imagine that your neighbour were able to go shopping using your credit card and you had no
control over what he or she was spending. You would quite rightly say that such a situation is
unacceptable - "I can't be liable for something that I have no control over."
However, the two propositions "Those who reap the benefits must also bear the costs" and "I
can't be liable for something that I have no control over" go beyond the personal level and
apply in an institutional context as well.
The principle of liability ensures that decisions are made more responsibly. This is also, and
especially, true for the institutional architecture of monetary union.
When I gave my speech at the Volkswirte Alumni-Club three years ago, I quoted today's
keynote speaker Harold James, who wrote in his book "Making the European Monetary
Union" that, without a common fiscal regime and without a stable financial system, the
monetary union had a very high centre of gravity that made for vulnerability and instability.
To stay with his allegory, the aim of an institutional reform in the monetary union must
therefore be to lower its centre of gravity so that it cannot be blown off course so easily. But
this will only work if the principle of liability is once again paid greater attention and a balance
is struck between action and liability.
The essence of this argument was taken into account when financial regulation was
overhauled and the banking union established. By tightening capital requirements and
introducing a bail-in regime, the principle of liability is being more rigorously enforced in the
banking sector: the greater the volume of liable capital that shareholders and creditors have
available, the greater the losses that a bank is able to shoulder and the less likely a taxpayer
bail-out becomes.
The principle of liability also plays an important role in the discussion surrounding a
European deposit insurance scheme. It cannot be denied that a single deposit insurance
scheme could have a stabilising effect.
However, as long as actions at the national level, such as drafting insolvency law or
responding to very high stocks of government bonds on banks' balance sheets, can have a
substantial impact on the welfare of financial institutions, savers from other member states
should not be held jointly liable.
In this respect, I welcome the fact that the Economic and Financial Affairs Council will not
decide on the European deposit insurance scheme until adequate de-risking measures have
been taken. And it goes without saying that adequate measures also include regulatory steps
leading to the end of preferential treatment of government bonds over loans to the private
sector. In any case, risk-appropriate capital backing and limiting government bond
investments would significantly reduce the risk of recourse being made to the deposit
insurance scheme.
Conclusions from the Brexit vote
Ladies and gentlemen
I agree with the President of the European Parliament, who has called for "a more unified
and cohesive European Union".
But this should not come at the price of increased joint liability unless joint control rights at
the European level are agreed at the same time. And, in this case, we would have to make
sure that the decisions made at the European level are also conducive to stability.
However, many of the proposals put forward before the Brexit referendum and aimed at
"completing monetary union" only focus on elements of joint liability and disregard the issue
of joint decision-making. They obviously anticipate and accept member states' reluctance to
transfer national sovereignty to the community level.
Although such proposals might lower the centre of gravity of the monetary union, to stay with
Harold James' allegory, they would also shift it to one side, which would not enable the
monetary union to survive as a stability union in the long term.
Opinions on the future shape of the monetary union therefore differ greatly. However, even
where common rules have been agreed - in the area of fiscal policy, for instance, - they are
not taken seriously, and the Commission lets the major euro-area countries, in particular, do
largely as they please. Not only does this damage the reputation of the European institutions,
it also impairs the soundness of public finances in the member states.
Unsound public finances can make it more difficult for monetary policy makers to fulfil their
mandate of ensuring price stability. It was precisely to protect the single currency that these
fiscal rules were agreed in order to prevent monetary policy from playing second fiddle to
fiscal policy and from coming under pressure to make high levels of debt sustainable through
low interest rates.
It is not only in the United Kingdom that the EU is seen as a canvas on which to project the
drawbacks of globalisation and migration. Euroscepticism exists in other EU member states,
too, and is possibly even strengthened by the fact that Europe breaks its own rules. I can
therefore only reiterate what the Federal Chancellor said on Tuesday: "A successful Europe
is a Europe that respects its treaties and keeps its promises."
Euroscepticism in the United Kingdom was so strong that, despite numerous warnings about
the economic consequences, the majority voted in favour of leaving the European Union. For
the first time in the history of European integration, a country wishes to leave the EU.
This decision is very regrettable and, in my eyes, a mistake. But it should be respected and
we will have to deal with it. It would appear that it is becoming harder and harder to convince
people of the benefits of the European Union and to encourage them to believe in Europe.
The decision marks a turning point both for the United Kingdom and for the EU as a whole
and we have no way of knowing exactly what the consequences will be.
Although the result of the referendum appeared to take the financial markets by surprise - at
least judging by the sharp drop of 11% in the value of the pound sterling on Friday - all
things considered, the reaction has not been disastrous so far.
The search for safe investments has led investors towards government bonds, which has
pushed long-term interest rates back down and caused the yield curve to flatten again. The
stock markets also recorded price losses and the pound sterling remains under pressure. But
overall, financial markets responded calmly and there were no signs of panic.
This was probably because, among other things, the vast majority of banks and supervisory
bodies had treated the Brexit scenario with the seriousness it deserved and had been
prepared for that outcome. Another reason for the lack of severe disruption is that banks are
now far more resilient than they were in the autumn of 2008. Nowadays, thanks to tighter
regulation, they hold more capital and are therefore more robust.
Even so, it should be borne in mind that the fall in long-term interest rates and the further
flattening of the yield curve will probably put more pressure on banks' earnings, which are
already squeezed. That alone is reason enough to doubt that we are already seeing the new
equilibrium prices in the financial markets. This means that a prolonged period of uncertainty
is a distinct possibility.
The ECB, along with other major central banks, has therefore announced that it will supply
additional liquidity if required. So far, this has not been necessary.
It is not clear at present how serious the economic impact will actually be.
In the run-up to the Brexit referendum, the International Monetary Fund (IMF) had voiced
concerns that established trade links would be disrupted, causing serious regional and global
damage. The IMF also predicts that, until the terms of the UK's withdrawal have been
negotiated, the uncertainty will have negative implications for investment and will give rise to
additional financial market volatility.
Although the sharp depreciation of the pound sterling is likely to dampen the impact on the
aggregate UK economy for a time, it is important to keep the spell of uncertainty as short as
possible.
It is in the interests of both parties for the EU and the United Kingdom to quickly enter into
level-headed negotiations on their future relationship. Neither party will have anything to gain
from erecting trade barriers.
Negotiations should not revolve around treating the UK better than other countries such as
Switzerland or Norway, nor, however, should the objective be to make a political example of
the UK.
The UK economy will bear the brunt of the Brexit fallout, although the pace of euro-area
activity might decelerate a little as well. And there is no way of telling what the political
implications will be.
Brexit will probably also place a strain on Germany's economy, particularly since the UK is
Germany's third most important export destination.
The Frankfurt financial centre alone might see new opportunities opening up, though that
would also call for political backing. We should welcome any businesses that shift their
activity from London to Frankfurt.
I see no need for any further loosening of euro-area monetary policy in response to the Brexit
vote. Monetary policy is already in highly expansionary mode, and it is doubtful whether
easing it further still would deliver any stimulus whatsoever. Monetary policy can be as easy
as it likes, but that cannot prevent political uncertainty from dragging on the economy.
The crisis that has now engulfed the European Union is a political one that needs to be
resolved in the political sphere.
Conclusion
Ladies and gentlemen
The Brexit referendum on 23 June marked a turning point in the history of European
integration.
The vote should be regarded as a warning shot in the debate on institutional reform in the
euro area.
It was, in my opinion, a grave error to increase mutual liability without simultaneously
communitising fiscal control rights.
However, if willingness to transfer sovereignty to Brussels is also limited in the euro-area
countries, the monetary union can only be stabilised in the long term by reinforcing individual
national responsibility in order to strike a balance between action and liability.
Incidentally, I mentioned this three years ago in my last speech here at the Munich
Volkswirte Alumni-Club.
On that note, I would now like to conclude my remarks and hand over to Professor James,
whose speech I very much look forward to hearing.
But before I do that, I would like to warmly congratulate today's award winners, and to pass
on my own thanks. I am delighted to receive the Hans Möller medal and see it as a token of
support and encouragement.
Monetary policy and European integration are really not simple topics. Helping the general
public to understand them is an important task. They are topics that do not just concern the
experts, but all members of the general public.
Thank you very much.