Flexible, with philosophy intact
Pity the poor Bundesbanker. The German central bank is staffed by loyal, long-serving officials. They’ve spent their entire careers in a structured environment where the rules of the game were clear and the way to advancement was marked out.
Now all the rules have changed, and the Bundesbank’s staff are being forced to choose between an uncertain future at the European Monetary Institute (EMI) or possible oblivion in their old jobs.
So far, there hasn’t been a stampede to join the EMI, despite the higher salaries paid just a mile away on the other side of Frankfurt’s Grüneburgpark. One reason is that the Bundesbank is becoming reluctant to provide return tickets valid in 18 months’ time, should the official not obtain a new contract from the management of the European Central Bank (ECB). The other reason, say cynics, is that working hours are far longer than those at the Bundesbank, where even senior managers go home at 3pm on Fridays.
That lack of enthusiasm is worrying for the Bundesbank. While Bundesbank president Hans Tietmeyer is almost certain to be one of the four – or six – members of the ECB’s executive board, the only hope of perpetuating Bundesbank ideals is through the rank-and-file staff who join the EMI now, and graduate to the ECB in 1999.
Although Bundesbank vice-president Johann Wilhelm Gaddum hopes otherwise, it seems doubtful whether any of the departmental heads, the Bundesbank’s dozen most senior officials, will want to move. All are in their mid-fifties or older. Moreover, the Bundesbank will not be able to decide whether to retain its most influential and persuasive staff or to send them to the EMI until it knows how the fundamental policy decisions will be handled. And Gaddum doesn’t believe in trying to force through staffing quotas, because that would be incompatible with the aim of getting the best staff for the job.
Lack of influence
The few senior staff who have left in recent years tend to be scathing about the lack of influence Bundesbank staff exert in practice. They claim that, although the Bundesbank’s direct influence is enormous, Bundesbankers themselves have less clout with other central bankers than outsiders might expect.
One reason is that the Bundesbank is not renowned for its scholarship. Reiner König, head of the economics department, is admired for his work, but is home-grown and almost unknown in academic circles. The degree König brought with him was not in economics, but in business studies. Several of the departmental managers – the level immediately below the directorate – never went to university. They came straight from school and were trained at the Bundesbank’s own academy, where the lecturers are all Bundesbank managers.
More recently, the bank has started recruiting outside experts, since the notable appointment of chief economist Otmar Issing in October 1990, followed by a number of his staff in the economics division. “The freedom to come up with unconventional new ideas was allowed for the first time once Issing was on board,” says a former Bundesbanker. Now there are initiatives to shorten the training period for graduate trainees, allowing them to specialize earlier. But critics inside and outside the bank say this modernization is coming too late.
With relatively low salaries on offer, even by Frankfurt standards, the very best brains are no longer attracted to a career in the Bundesbank, particularly as the bank’s influence is bound to wane after Emu. “They are people of limited means – financially and intellectually,” says another former senior official.
Competition will be tough for the best positions at the ECB. The French government is well known to want its own candidate at the head of the bank. EMI-watchers say the French are also trying to exert influence on key policy jobs lower down, such as head of department or head of division levels. Economic policy is where the Bundesbank wants to have most impact, but it is not particularly strongly represented in that area at the EMI so far. Its top man there, Peter Schlüter, heads administration.
All this suggests that the Bundesbank’s influence on the big issues is still unclear, and Gaddum, in an interview with Euromoney (see bottom of page), acknowledges that the Bundesbank will have to be flexible on almost every important policy, from the main measure of monetary policy to the accounting of reserves. Only a stable currency policy and the independence of the central bank are inviolate, Gaddum says.
The Bundesbank’s awkward position was underlined recently in its recent confrontation with the government over the valuation of its reserves. On May 15 finance minister Theo Waigel and his chief government official Jürgen Stark arrived unannounced by helicopter just as the central bank council was convening for its fortnightly meeting. The Bundesbank had been forewarned that morning by a report in daily newspaper Handelsblatt that “Bonn has designs on Bundesbank gold reserves”.
Seeing the report in print was undoubtedly a shock. But according to Waigel and Stark, the revaluation of Bundesbank assets was not news to Tietmeyer.
Plenty of warning
Despite Tietmeyer’s protestations of innocence, the Bundesbank had much more than a few hours’ warning of Waigel’s demands, even though his personal appearance at Bundesbank headquarters seems to have been a genuine surprise. Banking sources in Frankfurt are adamant that the central bank had long been considering how to revalue its reserves, and that Waigel had already been informed of its intentions.
Early in 1997, the German central bank had begun drawing up plans for the revaluation of its gold and currency reserves, which are booked at historically low values. In the case of gold, that figure is $92 per ounce, compared with the current market price of around $340. Likewise, the US dollar reserves of approximately $48 billion are in the books at an exchange rate of Dm1.3620, somewhat lower than the current (mid-July) Dm1.78. By the beginning of this year the Bundesbank already knew that the new Emu rules would revalue its reserves at, or at least nearer, market prices. Some significant adjustments were inevitable.
But there was no hint of that in the following months. In March, Tietmeyer even faced a parliamentary committee to explain why he opposed revaluation. It seems his testimony was just a smokescreen.
So when Waigel’s plan was revealed two months later, the Bundesbank cried foul. The bank made an unusually passionate statement, condemning the finance minister’s scheme as “an intervention in the Bundesbank’s autonomous right to draw up and present accounts and thus in its independence”.
There were rumours that Tietmeyer had seriously considered resigning in protest. Predictably, the banking community and public opinion leapt to the defence of the Bundesbank, which is popularly regarded by Germans as the guardian of the people’s purse.
Yet, far from being the hapless victim, the Bundesbank was fully appraised of the situation. By allowing Waigel to suggest revaluation, the central bank enticed him to walk into a trap of public outrage.
The Bundesbank has always been touchy about the government’s eagerness to cream off handsome dividends from the bank. Helmut Schlesinger, Tietmeyer’s predecessor as Bundesbank president, introduced a more stringent approach to valuing the bank’s reserves to the lower of cost or market. His motive was to present the Bundesbank’s profit as the smallest possible figure using all the options available under Germany’s conservative accounting rules. Even so, the central bank transferred billions of Deutschmarks to the finance ministry every year (Bonn received a dividend of Dm8.8 billion for 1996). Schlesinger’s worry was that paying unnecessary billions to Bonn might swell the money supply and undermine the Bundesbank’s own objectives.
Despite this background, it is not obvious why the Bundesbank might have staged a row with Bonn over its own reserves. Some Frankfurt bankers suggest it wanted to flaunt the strength of its public support. Perhaps a more credible explanation is that Waigel angered the Bundesbank by abruptly proposing to use the proceeds of revaluation to pay an increased dividend to reduce the budget deficit rather than booking them as a reserve, as the Bundesbank intended. “It’s not the time or the place for this,” says Gaddum. So the Bundesbank feigned ignorance of the entire scheme.
Yet in the end it was forced to compromise. That illustrates the paradox the German central bank has created for itself over 40 years. Its first credo, apart from independence from government, is to ensure the stability of the currency. In the face of unexpected or outrageous government policy, the Bundesbank may be forced to modify its reaction for fear of undermining confidence in the Deutschmark.
Even in 1990, when Bundesbank president Karl Otto Pöhl was outraged to learn that the government had offered monetary union to eastern Germany on unrealistic terms and – as it turned out – with disastrous consequences for much of east Germany’s economy, the Bundesbank only blinked when it might have roared. Pöhl’s protest was ambiguous: he waited a year before resigning.
Since then, the German government has become even less predictable. In the same month that Waigel revealed his revaluation scheme, he also wanted to sell off Deutsche Telekom shares earlier than planned (he was rebuffed by the company’s veto), and decided to advance other privatizations and to increase government borrowing yet again.
Embarrassingly, the gold affair has revealed that the Bundesbank does not know what Waigel will do next. During the gold crisis Howard Davies, deputy governor of the Bank of England, put his finger on that sore.
He couldn’t resist remarking at a banking conference in Frankfurt that the UK would achieve the 3% criterion for the budget deficit this year “without the chancellor needing to pay a visit to the vaults of the Bank of England”. Wendelin Hartmann a Bundesbank directorate member on the podium with Davies that day, couldn’t bring himself to crack a smile.
According to Ernst Welteke, the most vocal member of the central bank council, Waigel’s plan has damaged the credibility not only of the Bundesbank, but also of the transition to a single currency.
Compromise struck
Nevertheless, a compromise was struck (the gold and currency reserves will be revalued, but the book proceeds will not reach Bonn until 1998 – too late to influence this year’s budget deficit figure, which will be of crucial significance for Emu).
Tietmeyer has a close relationship with Bonn. Before joining the Bundesbank as vice-president he was a state secretary for many years and still counts as a Bonn insider. He has a good personal relationship with both Waigel and chancellor Helmut Kohl.
Evidently he was prepared to make substantial compromises before a showdown. Moreover, it would have been humiliating to resign just before the Bundesbank’s 40th anniversary on July 26.
Resignation is Tietmeyer’s ultimate weapon and it’s being held in reserve. At present the Bundesbank can’t afford the dislocation such a resignation would cause: it needs the next 18 months to persuade European governments and the EMI of its philosophies and its view of the market.
Several major policy issues are still open. Wim Duisenberg, the new president of the EMI, said even before taking office on July 1 that the EMI governors would decide this year how to revalue central banks’ reserves. That would apply not only to the portion of reserves the Bundesbank hands over to the ECB, but also the portion it keeps.
Crucially, the EMI council has only just begun discussing how fundamental policy issues will be tackled after monetary union. Will policy on issues such as reserve requirements and market intervention be drawn up by staff at the ECB, or will the committees of national central bankers continue to meet every two weeks to thrash out policy recommendations?
The Bundesbank favours the committee method, but cannot be certain its views will prevail. Meanwhile staff at the EMI may soon be involved in the most crucial policy of all: it seems inevitable that some sort of European monetary policy will have to begin as soon as European political leaders decide next spring which countries are in – and which out.
Gaddum says he’s confident the European central bank will uphold the Bundesbank’s two fundamental philosophies: independence and a stable currency.
The details will prove more troublesome, however. Gaddum acknowledges that other articles of faith are still in doubt. These include the use of the money supply (rather than an inflation target) as the main measure of monetary policy, the minimum reserve requirement for banks, regular market regulation rather than intervention, and a decentralized structure for the central bank.
At the same time, the Bundesbank must watch Bonn. Since the bank’s bearish report on Emu in 1992, it has issued increasingly frequent warnings. Issing is publicly anti- Emu and does not hesitate to criticize economics which he believes threaten the Deutschmark’s stability.
Forgiving note
Over the past two years, however, the Bundesbank has taken a more forgiving tone when discussing Germany’s failure to match the 3% limit for the federal budget deficit laid down by the Mastricht Treaty. Although the government insists it will achieve 3% this year, most economists believe that to be impossible on present policies. Tietmeyer is helping Waigel: in recent months he has constantly pointed out that the treaty emphasized the importance of sustaining a sound economic performance rather than achieving a particular figure.
Yet the events of the past few weeks have demonstrated that Waigel is unpredictable. He continues to announce plans, such as a further increase in borrowing, which the Bundesbank has warned against. He may disappoint the Bundesbank by failing to keep pledges.
As German monetary union in 1990 demonstrated, the government is capable of making unexpected policy announcements, without consulting the Bundesbank, that have a profound effect on the country’s finances – and on Deutschmark interest rates. In 1990 the Bundesbank had to rearrange its monetary policy to cope with the threat to the Deutschmark.
Yet even after the bitter experience of the gold crisis, Gaddum waves aside any suggestion that the Bundesbank should be more critical of government policies, saying simply: “The markets have been more volatile in recent weeks.”
Soon the politicians will decide which countries join Emu – and on what terms. That will determine whether the euro is likely to be weak or strong.
Gaddum does not give a clear answer when asked whether a weak euro would be a resigning issue. But past experience suggests the Bundesbank can be subjected to enormous difficulties without cracking under the strain. Since both the Deutschmark and German interest rates are very low, leaving the Bundesbank substantial room for manoeuvre, Tietmeyer is likely to think it worth staying to fight, whatever happens.
