Bundesbank changing of the guard – A missed opportunity

Rafael Mentges

11 mins - 13 de Enero de 2022, 17:25

Since the surprise announcement of the resignation of Bundesbank president Jens Weidmann on October 20 of last year, there has been a great deal of speculation about his reasons for leaving five years before the expiration of his contract. Conservative German media, especially, has speculated that frustration over the expansionary monetary policy of the European Central Bank (ECB) may be behind the resignation. Former ECB chief economist Jürgen Stark even told Reuters that the resignation is "understandable and resolute" adding that "nobody can support a policy that goes against his own convictions for more than a decade."

Inflation is always a hot topic in Germany and the nation’s central bank is one of its most trusted and respected institutions. The Bundesbank has earned this trust over the decades since its establishment in 1957, boasting an impressive track record of low inflation and a stable currency. This stability-oriented policy contributed to the recovery of the German economy and established the German mark as one of the most important reserve currencies while making the Bundesbank the second most influential central bank in the world, after the Federal Reserve of the United States. 

While the Bundesbank has lost most of its power to set monetary policy to the ECB, the Bundesbank is still the most important national central bank of the Eurosystem with more than twice as many employees as the ECB and a wide range of responsibilities including financial stability, banking supervision, and payment systems. All of this, combined with the experience of hyperinflation in the 1920s and the increasing inflation rates of late 2021, makes it understandable that many Germans are particularly concerned about who is leading their central bank. 

Until Weidmann's successor at the helm of the Bundesbank was finally announced on December 20, several prominent candidates had been named as possibilities. Most prominent among these were Isabel Schnabel, who is currently serving on the ECB executive board; Claudia Buch; and several SPD favorites like Jörg Kukies and Marcel Fratzscher. Before the German newspaper Frankfurter Allgemeine speculated about the possible nomination of Joachim Nagel as a compromise candidate on November 15, he had not appeared on any short list (except for one). So who is Joachim Nagel? 

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Although there are not many comments by Nagel himself regarding the monetary policy stance of the ECB, the few that do exist indicate a view similar to that of his predecessor, Jens Weidmann. Comments from people close to Nagel also suggest that we can expect policy continuity. That means he is following the Bundesbank tradition of what they call a "stability-oriented monetary policy" with a narrow interpretation of the ECB's mandate. While there is nothing wrong with a stability-oriented monetary policy and a narrow mandate – on the contrary, these are still two of the most important concepts for an independent central bank – it has recently become synonym with being overly concerned about inflation and implicit rules in times of deflation risks and a changing economic environment that demanded for new pragmatic approaches to monetary policy. The fact that we probably get another of those traditional Bundesbankers is a missed opportunity of two reasons. 

While Weidmann was more pragmatic and more of a team player than Axel Weber, his predecessor who left the Bundesbank because of a severe disagreement over the direction of the ECB's monetary policy, he also had too conservative an interpretation of the ECB's mandate and its legal limits. He has been on the wrong side of policy decisions too many times in his career. He opposed, for example, the ECB's Outright Monetary Transactions (OMT), which was the offspring of Mario Draghi's "whatever it takes" speech that saved the Euro Area from dire consequences in 2012. He also voted against the Asset Purchase Programme (APP), the ECB's version of quantitative easing. Time and again, he emphasized inflation risks when deflation was actually the bigger risk. While this did not prevent the ECB from taking action, it might have raised doubts about the future trajectory of interest rates, especially in times when more consensus was needed to calm markets. 

This transitions well into the second argument: he has always been an important voice in the economic debate in Germany. He always stayed fair and factual in his statements to the German press when he disagreed with the ECB's decisions. But he nevertheless also created the impression that he was continuously at odds with the ECB's monetary policy. In times of rising populism and anger against the negative interest rate policy of the ECB in Germany, he did not do enough to explain and defend the ECB's decisions despite disagreeing on details. Instead, he became the champion also of those conservative populists who see the ECB as an instrument to rip off Germans savers in favor of southern Europeans who "didn’t do their homework." 

There is actually a third argument. Because of his constant disagreement with the rest of the governing council, he became isolated at the ECB and might have lost the ear of his European colleagues and therefore some measure of influence over them. However, it is not entirely clear whether this is true or just an exaggeration of the media as he was also seen as a respected colleague with a high level of technical competence

Many Green and SPD party members and voters would probably have welcomed a change in tone at the Bundesbank. So why did why they choose Joachim Nagel? It was speculated early on that the successor to Weidmann must be a compromise candidate, as the new coalition also includes the pro-business Liberals of the FDP, who have been critical of the ECB’s expansionary monetary policy.  There are probably two reasons for his selection: he is himself a member of the SPD and worked as a consultant to the SPD in the 1990s. In addition, his views are compatible with those of the FDP and its finance minister Christian Lindner, whose responsibility it is to propose the candidate.

And therein lies the next problem. Appointments to the board of the Bundesbank seem to be driven mainly by politics rather than qualification. Both Jens Weidmann and his predecessor Axel Weber complained about how positions on the board of directors are assigned. Among those currently serving on the board of the Bundesbank, nearly all of them have some sort of connection to one of the major parties in Germany. There are three former CDU/CSU politicians, one former personal assistant to an SPD state secretary, and even Weidmann probably owes his position – despite some relevant credentials – to his close connections to the CDU and especially Angela Merkel. He previously served as an advisor to Merkel at the Federal Chancellery between 2006 and 2011. The only board member exempt from this pattern is Claudia Buch, with no direct party connections and an impressive professional and scientific track record that undoubtedly qualifies her for the board of the Bundesbank. 

It is of particular concern that political considerations seem to play such an important role in that it sets a bad example for other countries that were always told by German politicians and central bankers how important central bank independence is. The Bundesbank was the blueprint for the establishment of a European central bank in the 1990s and its independence was a central part of the design that Europeans agreed on for the ECB. Furthermore, it sets the wrong incentives for German economists: They know that if they want to join the Bundesbank, it is helpful to seek good relations with one of the major parties.

The next missed opportunity is about gender balance. If they had sought a person for the job (due to possible veto threats by the FDP) with a rather conservative stance on monetary policy (and European integration, as well), the aforementioned Claudia Buch would have been the perfect fit. It is actually a perfect example of having two candidates with similar profiles and ultimately granting the job to the male prospect. Indeed, in this case it could easily be argued that Claudia Buch is the better qualified person. Moreover, it would have sent a strong signal to appoint at least one female president at a European national central bank. Right now, the 19 national central banks in the Euro Area are exclusively run by men. Moreover, there has only been one female national central bank governor since the introduction of the euro. The only exception is the ECB itself, where President Christine Lagarde is trying to improve the gender balance in her institution. One cannot even find a woman on the ECB's General Council, which additionally comprises the eight central bank governors of EU member states that have not adopted the euro as their currency. There is only one argument against Buch's appointment (besides her lack of party affiliation): she is considered media-shy. Then again, Joachim Nagel has not proven better at it. 

When it comes to qualifications, Joachim Nagel is without a doubt up for the Job. Nagel studied economics at the Karlsruhe Institute of Technology and has worked as a researcher in the US. He joined the Bundesbank in 1999 and has spent most of his career there. He started as head of markets and later became a board member. He spent most of his time at the German central bank supervising capital markets. In 2016 he decided to leave the Bundesbank for "personal reasons" and joined the executive board of KfW, the German state-owned development and investment bank. In November 2020, Nagel became deputy head of banking at the Bank for International Settlements. 

But the question is not whether he is fit for the job but whether he is the best they could find. While Nagel knows the Bundesbank inside and out, he is more specialized in financial supervision and the markets side of central banking and less experienced in monetary policy.  Moreover, it would have been good to see someone in the chair with a proven scientific track record. Here again, Claudia Buch would have been the better choice. But apparently, that is not what the German government was looking for. According to a report by the Financial Times, Nagel was appointed "partly out of a desire to install a central banker rather than an academic at the helm of the Bundesbank to maintain the stature and influence of the institution."

While Joachim Nagel, like his predecessor Jens Weidmann, is not likely to change the current monetary policy stance of the ECB – after all he is only one of 19 central bank governors – his appointment might have serious implications for the monetary policy of the ECB after Christine Lagarde’s eight-year term ends.  As head of the German central bank, he is an obvious candidate for the ECB presidency. But if he turns out to be too hawkish, like Jens Weidmann or Axel Weber before him, he will have a hard time convincing other European countries that he is a good option to lead the ECB. This is especially true in times of crisis, when pragmatic decisions require a bit more intellectual flexibility and courage.

(Here, the analysis translated into Spanish) 
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