2017

IMFS Distinguished Lecture
Jens Weidmann, President, Deutsche Bundesbank
“Monetary Policy After the Crisis”

Speech (English version)

During his IMFS Distinguished Lecture, Jens Weidmann, President of Deutsche Bundesbank, reminded the European Central Bank (ECB) not to miss the exit from quantitative easing (QE) even though the expansionary monetary policy is still adequate currently. “We’re not talking about slamming on the brakes but rather about no longer constantly putting our foot down on the accelerator”, Weidmann said, speaking to more than 350 guests.

The large-scale bond-buying program after the financial crisis has turned the Eurosystem into the member states’ largest creditor. “This has additionally blurred the line between monetary policy and fiscal policy”, Weidmann warned. In his opinion, government bond purchases should purely be used as an instrument of last resort. Moreover, economic recovery in the euro area continues and gains further momentum. Furthermore, even after the net purchases under the asset purchase program have been discontinued, government bond holdings are at a high level. Thus, euro-area monetary policy will remain extremely accommodative.

According to Weidmann, the expansionary monetary policy has an impact on the risk appetite of market participants and banks. However, he pointed out that government bond purchases also have some inherent unintended side effects. “Even the Germans, who tend to be very conservative in their investment decisions, are currently putting more money into potentially more profitable, but also riskier financial assets such as shares and mutual funds”, Weidmann noted. On the other hand, banks tend to become less wary of taking on excessive risk.

Regarding financial stability, Weidmann declined that policymakers should make it an explicit objective maybe even on a par with the objective of price stability. “The more objectives monetary policymakers pursue, the more likely that they will get mired in a conflict of objectives”, he said. The concept of financial stability was much harder to grasp than that of price stability and there was no indicator for financial stability as it is the case for price stability. According to Weidmann, macroprudential instruments such as countercyclical capital buffers for banks or measures that target the demand for credit were much better suited. “So where monetary policy is the hammer in a central bank’s toolkit in relation to financial stability, macroprudential instruments are the scalpel”, Weidmann added. Apart from that, many macroprudential measures require democratic legitimacy. Therefore, it is politicians who decide on the use of macroprudential measures, not the Bundesbank, and for good reason.

Nevertheless, in his opinion, a central bank must not lose sight of financial stability: “It may be advisable, even for a monetary policy that focuses exclusively on the objective of price stability, to heed developments on the financial markets”, Weidmann concluded. For permanent macroeconomic stability could not be achieved without financial stability.

IMFS Distinguished Lecture
Valdis Dombrovskis, Vice-President, EU Commission
"How to Make the Euro a Lasting Success?"

Slides (PDF)

Valdis Dombrovskis, Vice-President of the EU Commission, sees a further need for closer economic and fiscal policy coordination in the EU. While presenting the Commission’s winter economic forecast during an IMFS Distinguished Lecture Dombrovskis said the euro area had become “more resilient” since the beginning of the Greek crisis, which by now had “very little spillover effects to other euro area countries”. This was a big difference to 2010 and 2011, “when we were seeing some kinds of domino effects”. According to the assessment of the EU Commission, the global economy is “rebounding in 2017”, and “unemployment continuing to decrease but still very high”.

With the EU Commission preparing country reports within the framework of the European semester, Dombrovskis outlined a range of recommendations for Germany where the EU Commission expects the economy to grow by 1.6 percent this year and by 1.8 percent in 2018. “Germany has weathered the crisis quite well”, Dombrovskis said. However, regarding the German currrent account surplus, he suggested to stimulate public investment further and to eliminate efficiencies in the tax system such as corporate taxation and local trade tax. Besides, Dombrovskis called for measures to boost competition in the services sector, in particular business services and regulated professions. On the other hand, Dombrovskis criticized the German pension system and the gender gap, calling for “increasing incentives for later retirements” and “reducing high tax wedges for low wage earners”, making references to the relatively high proportion of women in in part-time and mini jobs.

In view of the Brexit decision of the UK government, Dombrovskis underlined the need for building a capital markets union. “This makes the case for strengthening the capital market more important”, he said. The EU should also address issues such as the insolvency of member states and the support of fintechs. The Greek program, however, Dombrovskis sees "on track” with the economy recovering. “If we now do this final push from outside we can conclude the second review”, Dombrovskis said. Regarding the cooperation with the International Monetary Fund (IMF), Dombrovskis was positive. “It think it’s solvable”, he said.