Bundesbank looks to learn from its past


By Ralph Atkins
Financial Times, London
Sunday, July 29, 2007


FRANKFURT, Germany -- Mervyn King, current governor of the Bank of England, was astonished on his first visit to the Bundesbank in the early 1990s, at least according to his host, Otmar Issing, then chief economist at Germany’s central bank.

"He asked to look around our offices and I said: 'Of course.' He was surprised because we were supposed to be so secretive." Mr King was particularly struck when he asked staff what they were doing. "We're working for the stability of the currency," Mr Issing recalls them telling him.

Mr King would find a different atmosphere this week as the Bundesbank celebrates its 50th anniversary. Since 1999 the bank’s interest rate decision-making powers have been transferred to the European Central Bank. Anniversary speeches by Axel Weber, current president, are likely to be heavy on lessons from the past -- and show nervousness about the future. Battles are likely over its role in private bank supervision.

In the early 1990s the Bundesbank, housed in a drab concrete building in Frankfurt, was at the height of its powers. In the decades after the second world war it earned enormous respect from Germans for its hardline stance against inflation, especially among those who remembered the hyperinflation of the 1920s. Not every German believed in God, but they all believed in the Bundesbank, quipped Jacques Delors, former European Commission president.

"Around the world, if you said you came from the Bundesbank you were treated with respect," remembers Mr Issing, who later joined the ECB's executive board. "In the minds of some, that led to them believing they were the greatest. I always warned against that."

The Bundesbank became "the textbook example of how to be a conservative central bank," says Dirk Schumacher, economist at Goldman Sachs. In its relentless efforts to resist inflation, the central bank contributed to the downfall of several German governments. Freedom from political intervention was crucial.

Central bank independence was not a German invention, but the Bundesbank perfected the application of the principle -- particularly after the collapse in 1973 of the international Bretton Woods fixed currency system. In the 1980s the D-Mark became the anchor of Europe's exchange rate mechanism.

The Bundesbank's authority was not automatic: Its independence could have been rewritten by parliament; and it had only one instrument at its disposal -- interest rates.

Dieter Lindenlaub, former head of the Bundesbank’s archive and library, says the art was to pick fights carefully. "You co-operated as much as possible, but in extreme circumstances you did not have any angst about a conflict."

After the collapse of the Berlin wall in 1989, the Bundesbank clashed with Helmut Kohl, then chancellor, over the one-for-one exchange of D-Marks for East Marks, the East German currency, which it feared -- rightly -- would lead to the collapse of highly-uncompetitive industry in the former Communist state.

A few years later the Bundesbank was sceptical about European monetary union. Germans, it feared, would surrender a strong D-Mark for a weaker currency, and it was aghast at the fiscal indiscipline of some future eurozone countries.

In the end the ECB was modelled on the Bundesbank, its independence secured by European Union treaty. Jean-Claude Trichet, ECB president, has followed Bundesbank practice in making clear his autonomy -- recently rebuffing Nicolas Sarkozy, French president.

The ECB's federal structure, with national central bank governors joining Frankfurt executive directors on its decision-making council, copied the German central bank. The ECB also shares the Bundesbank’s faith in money supply data as an inflation early-warning signal.

But the Bundesbank's past brazenness may prove a disadvantage when it needs allies in Berlin. The German finance ministry is considering plans to increase Berlin's control over the supervision of private banks. Mr Issing says: "Government and politicians were not always on the Bundesbank’s side.

"We have to see if it just becomes an historical memory, or can redefine its position. I think it will be able to find a place in the public's mind. A country's central bank has major responsibilities -- for instance in bank supervision."

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