Tension exists between the Bundesbank and the European Central Bank (ECB) over the measures adopted by the ECB to contain and resolve the eurozone crisis. The Bundesbank’s key concern is that these measures compromise the independence of the ECB, and it wants European governments to accept the fiscal consequences of a monetary union.
The author explores the tensions between the Bundesbank and the European Central Bank (ECB) and identifies the root cause as the issue of central bank independence.
How Is This Article Useful to Practitioners?
The author briefly recounts the history of the Bundesbank and the independence it enjoyed from government interference, allowing it to preserve its goal of keeping prices stable and, therefore, maintaining economic and social stability. Today, the ECB sets the monetary policy for the euro area; the Bundesbank and the other national central banks implement the policies in their countries.
The actions taken by the ECB to contain and resolve the eurozone crisis have resulted in tensions between the ECB and the Bundesbank. The key issue between the institutions is bond buying, which exposes the Bundesbank directly to the risk of losses and indirectly to payment-system balances. Concerns focus on the size of the Bundesbank’s TARGET2 claims, which settle payments between the national central banks in the eurozone. As capital has fled the troubled economies of southern Europe and Ireland, peripheral central banks have had to borrow more from those in the core, such as the Bundesbank.
The ECB’s decision to buy Greek government bonds in May 2010 led to the resignation of Axel Weber, then president of the Bundesbank. His successor, Jens Weidmann, has also opposed Outright Monetary Transactions (OMT), a new program that involves the unlimited purchases of short-term bonds if a government signs up for an austerity and reform program, as announced this summer by Mario Draghi, president of the ECB.
The Bundesbank’s main worries about the ECB buying bonds are that it exposes the taxpayers in northern countries to risks in southern countries in an opaque way. It also takes monetary policy close to fiscal policy, thereby compromising the ECB’s independence.
Essentially, the Bundesbank is trying to clarify that a monetary union has fiscal consequences and that it wants European governments to recognize the problems and start to work toward a fiscal and political union.
I believe that the tensions between the Bundesbank and the ECB are beneficial for the sustainable future of the eurozone. By opposing the unconventional measures adopted by the ECB, the Bundesbank is essentially putting pressure on European leaders to quickly decide on a fiscal and political union roadmap for the eurozone, which I believe is required for a monetary union to survive in the long run. Meanwhile, the measures adopted by the ECB are required to contain the crisis and buy time for European leaders to agree on such a roadmap.