jens weidmann : an impossible trinity? the interplay of monetary, financial and fiscal stability welcome remarks by dr jens weidmann, president of the deutsche bundesbank and chairman of the board of directors of the bank for international settlements, at the bundesbank spring conference “ monetary, financial and fiscal stability ”, eltville, 10 june 2016. * 1. * * introduction ladies and gentlemen i would like to welcome all of you to the bundesbank spring conference. it is a great pleasure to have you here. an old joke about economics is that it ’ s “ the only field in which two people can win a nobel prize for saying exactly the opposite thing ”. but sometimes, it is also a field in which people say exactly the same thing – and even nobel - prize - worthy things – without having ever talked to one another beforehand. that was the case with robert mundell and marcus fleming – at least if anecdote is to be believed. they conducted research on the same topic – stabilisation policies for open economies ; they worked at the same institution – the imf ; and they came to basically the same conclusions. but they did not join forces to produce the insights that form the basis of our understanding of open - economy macroeconomics to this day. one of the insights offered by what is known as the mundell - fleming model is that you cannot have it all – a fixed exchange rate, free movement of capital and an independent monetary policy – at the same time. this insight came to be known as the impossible trinity. our conference today will not be dealing with the ramifications of this trinity, although it remains the subject of academic debate, as the research work by helene rey, for example, shows. instead, it ’ s another trinity, the trinity of monetary, financial and fiscal stability, that is the focus of today ’ s conference. and while this trinity should not be an impossible one, the recent financial and sovereign debt crises suggest that it might be a more improbable one than everyone perhaps thought ten years ago. even if robert mundell and marcus fleming are counter - examples, i think that economic research benefits from an exchange of views. more often than not, it ’ s discussion with others that produces a new idea or uncovers a flaw in reasoning, whereas a breakthrough is seldom achieved working alone. what is true of economic research in general seems to be particularly true of research on the interplay

bargaining system does not take into account the large differences in individual firms ’ specific situations, so it is not the most suitable one to prevent the bout of weak demand from generating a sharp fall in employment. further, the predominance of indexation clauses in collective labour agreements is a problem that becomes particularly harmful when, as in the current circumstances, inflation has risen due to an external shock, like oil prices, at a time of cyclical weakness. it is naive to believe that automatic wage adjustment to reflect past consumer price increases provides any protection to household disposable income. on the contrary, these clauses ( which have now been done away with in most european countries ) lessen the ability of firms to compete and keep creating jobs, generate inflation ( which affects those not protected by similar provisions ) and, in short, hinder adaptation to the external shock. in general, these characteristics of the spanish labour market have meant that employment has so far been the economy ’ s main adjustment variable in periods of crisis, since it is the quantities ( i. e. the number of workers ) that change given the impossibility of adjusting prices, i. e. wages. thus it is not surprising that in the past year the unemployment rate in spain has risen by 2. 4 percentage points to 10. 4 % in 2008 q2, while in the same period the euro area unemployment rate has remained relatively steady at a little above 7 %. the fact that spain has the highest unemployment rate of the oecd countries should lead us to reform our labour market institutions and improve this lamentable ranking. many of my talks in recent months have referred to the activity of spanish financial institutions. these played an essential role in the fourteen years of expansion and, thanks to their capable management, were in a sound position at the beginning of the international financial crisis. but it cannot be denied that spanish institutions face difficult challenges : first, as noted above, although they were not agents of the crisis, they are being affected by the standstill on the international financial markets ; second, balance - sheet building by firms and households, which i mentioned earlier, will lead to a substantial moderation of borrowing by these sectors and hence to a reduction in the business of credit institutions ; finally, the phase of real - estate adjustment and, in general, of economic slowdown, is already being reflected in increased doubtful assets, although this was to be expected and is still far from reaching alarming levels. for all these