Interview with Jens Weidmann conducted by Gregor Peter Schmitz and Stefan Stahl.
Translation: Deutsche Bundesbank

Mr Weidmann, is the coronavirus pandemic bringing back inflation? According to the Harmonised Index of Consumer Prices, the inflation rate in Germany rose from -0.7% to 1.6% in January.

The inflation rate will rise further still this year. In Germany, the VAT rate has gone back up to its previous level, which is feeding through into prices. On top of that, there is the price tag attached to carbon, which is also pushing up the inflation rate. However, coronavirus has forced consumers to exercise restraint, and the impact this will have after the pandemic is disputed. Many people are currently unable to spend their money at all, leaving them with no option but to save more.

What will people do with that money after the pandemic? Keep it stashed away or go on a spending spree?

That is not yet clear. In any case, people won’t be going out for dinner twice a day. But I can imagine that many people will then head out to beer gardens and restaurants. Perhaps for a while they will even eat out more frequently than before. That will depend on whether or not the owners of restaurants and bars raise their prices. The same will be true of travel, for example. However, it is probably households with higher incomes, in particular, that have built up savings. For these households, the share of financial resources that go towards consumption is usually lower than for others. And inflation rates will only see a truly sustainable increase if wages also rise. That is a crucial factor. At any rate, we are keeping a close eye on developments.

Can you venture an inflation forecast for Germany anyway?

As things stand today, the inflation rate as measured by the Harmonised Index of Consumer Prices is likely to be above 3% in Germany towards the end of the year. This will only be temporary – I have already mentioned several one-off effects. But one thing is clear: the inflation rate will not remain as low as it was last year in the long run.

Will the European Central Bank then put a stop to its excessive monetary policy?

Monetary policymakers will tighten the reins if the price outlook requires it. But right now, their goal is to combat the effects of the pandemic, which is why monetary policy has become more expansionary still. However, if inflation rates in the euro area rise, we will once again discuss the underlying monetary policy stance.

So what are the implications of the pandemic for the European Central Bank’s monetary and interest rate policy?

The ECB has recently expanded its asset purchases by a further €500 billion, taking the total envelope to €1.85 trillion. This has further delayed the normalisation of monetary policy. The low interest rate period will last longer. But there were differences of opinion in the Governing Council of the ECB, of which I am a member, when it came to the proper size of the purchase programme.

Do you sometimes dream of a time five years from now when we have decent interest rates and you were the brave one at the table who ultimately always pushed for them?

I’m not sure it be useful for me to speak about my dreams.

Can you not give German savers a glimmer of hope that interest will return at some point, perhaps five or ten years from now?

We have been in a phase of low inflation rates, and hence very low interest rates, for quite some time now, but I am convinced that this cannot go on indefinitely. It is all the more important for the Governing Council of the ECB to scale back its very expansionary monetary policy in good time, as soon as it is foreseeable that we will achieve our target inflation rate. When that time comes, there can be no lack of determination, even if it increases the financing costs for highly indebted countries.

So what exactly needs to happen after the coronavirus pandemic?

Public finances in the euro area need to be put in order after the crisis. After all, government debt in the euro area as a whole now exceeds annual economic output. Again and again, monetary policymakers have to make it clear that they are guided by price stability and do not make accommodation for how that affects the sustainability of government debt. This is important for the credibility of monetary policy and for public confidence in the Eurosystem.

Don’t you want to give thrifty savers hope that interest rates will eventually rise?

But in the pandemic, even those frugal folk should have an interest in monetary policy supporting economic activity and the labour market. This also benefits them. And let’s not forget there’s more to us than just savers. Borrowers benefit from very low interest rates. Taxpayers benefit from government’s favourable financing conditions. Ultimately, the Governing Council of the ECB does not target a certain interest rate level for savers. Our clear promise to people in the euro area is that their money will remain stable in value. That is what I advocate.

How are we doing economically? The state premier of Rhineland-Palatinate, Malu Dreyer, believes that “we have come through the pandemic well overall”. Chancellor Angela Merkel reportedly said that it – the pandemic – has slipped out of control.

Those are statements that mainly call for an epidemiologist’s judgement. That is not my core skill set as Bundesbank President. In the end, it's also a matter of making large-scale political trade-offs. If you want my opinion as a regular citizen, I can understand both of these statements. Of course, the situation is wearing for all of us, with the infection rate still higher than hoped for. The new virus mutations are also making things more difficult ...

And what can be said for the more optimistic view of SPD politician Malu Dreyer?

That it would be wrong to ignore what we have achieved: we have so far been able to prevent the health system from being overburdened, and we now have not just one but several highly effective vaccines, although vaccinations are unfortunately being delayed. Another reason to take a more upbeat view is that the economy as a whole has so far weathered the crisis quite well, even though certain sectors have been hit very hard.

So is the Bundesbank sticking to its economic outlook from December, which sees the German economy growing by 3% this year? Is there reason for optimism then?

Forecasting is far from simple at the moment. You see, economic developments crucially depend on how the pandemic evolves, making them just as uncertain. If we manage to get the pandemic more under control over the course of the year, and the containment measures can be largely relaxed, the German economy will continue to recover. That's why our economists see no need to radically revise our December forecast at the present time.

What makes you so confident?

Our experts were already fairly cautious when they prepared this forecast. Industry has been robust of late, due in part to global demand for German products. This is one reason why the German economy won’t have experienced too much of a setback in the current quarter. That said, the first three months of this year will be worse than indicated by our forecast. Much now depends on how the pandemic progresses and when containment measures can be lifted.

In terms of the economy, when will we be back at pre-coronavirus levels? As soon as 2022?

According to our December forecast, early 2022. But at the risk of repeating myself, this hinges on getting the upper hand, medically speaking, over the pandemic in the course of this year.

Enough people need to have been vaccinated for that to happen, though.

My impression is that manufacturers are currently doing their utmost to ramp up production. For example, more companies are now being included in the manufacturing process. Anything that can be done to speed up and expand vaccine production is undoubtedly money well invested.

Would we have been better off with a national vaccine procurement scheme rather than relying on Europe?

The basic idea of ordering together was certainly the right move, and it was a prudent response to the conflict-prone way in which countries were going it alone at the start of the pandemic, for example by banning exports of personal protective equipment. If mistakes were made in the procurement of vaccines, these need to be examined so we can learn from them. Heated debates about what we could have done better back then with the knowledge we have now won’t get us anywhere, though.

But even the Chancellor herself has been surprised at times during the pandemic by Germany’s weak spots, such as the lack of digitalisation at its public health offices. Long before your time at the Bundesbank, you worked closely with Ms Merkel as Head of the Department for Economic and Fiscal Policy at the Federal Chancellor’s Office. 

There wasn’t any major public debate about how our health offices are equipped before the pandemic struck, at any rate. We are very good at analysing the causes of a particular crisis and at preventing that kind of crisis from recurring. But the trouble is, every crisis is different, and the next crisis will probably be a whole new ballgame. I worked in a department of the International Monetary Fund in the late 1990s in which models were developed to predict financial crises. With each crisis, these models became better at explaining past crises. But this didn’t mean, by any stretch of the imagination, that we were able to reliably predict what crisis would come next. Coming back to your question, though, we spent too little time in the summer of 2020 concerning ourselves with what was going to happen in the autumn. After all, there was a major sense of relief that the first wave was behind us.

The coronavirus crisis has also spawned criticism, most recently from Axel Weber, your predecessor as Bundesbank President. Federalism is too inefficient in exceptional situations, he claims. What’s your take?

I believe that a system of government shouldn’t be created solely for exceptional situations. And just think back to the first wave of the pandemic, in which Germany got off lightly compared to many of our neighbouring countries, including some with a highly centralised government structure. At that time, Germany’s decentralised structure – with its local health offices and a broader network of laboratories – was regarded by many as one of our strengths.

So, at the end of the day, federalism really is better than centralism.

That’s too much of a generalisation. Both have their strengths and weaknesses. What I find much more worrying is the sometimes similar-sounding discussion as to whether, in light of the pandemic, democracy – be it a federal or central model – might be no better than an authoritarian regime after all. Given that there are democracies such as South Korea, Taiwan and New Zealand that have kept the pandemic under control and a large number of authoritarian regimes that have failed to do so, that proposition does not even have any basis in fact, in my view. But what makes this comparison worse is that it fails to acknowledge the value of a democracy, namely that its citizens are able to determine the government’s political direction and also criticise decisions. I firmly believe that our open, democratic and market-based society is ultimately best for people’s well-being and prosperity.

You have developed scenarios for predicting crises. Which crisis will come next after the coronavirus pandemic? Are we going to hurtle straight into the next debt and euro crisis, with Italy as its epicentre?

Governments are going to have to scale back their debt once the pandemic is over. So we will have to look at how European fiscal rules can be made more effective. We have committed to a single monetary policy in Europe, but the Member States have not been willing to surrender the autonomy they have over their national budgets. This provides incentives for governments to take on more debt. High levels of debt make the euro area vulnerable and could lead to a situation where monetary policymakers come under pressure to keep borrowing costs low.

What exactly does that mean for the ECB?

In addition to the fiscal rules, the capital markets also need to have a disciplining effect on public finances. That’s why it’s important that the ECB’s purchases of government bonds do not undermine market discipline.

Angela Merkel’s chief of staff, Helge Braun, has called for a suspension of the debt brake and suggested that the constitution be amended to allow Germany to take on new borrowing. Is one of the CDU’s last-remaining core beliefs being challenged?

At the moment, it is difficult to tell how much consolidation will be necessary once the crisis is over because the situation is simply much too uncertain. That said, any debate about when and how consolidation should take place needs to acknowledge that the debt brake helped place public finances on a sound footing while times were good. It has left general government where it is today, with the financial capacity to act where necessary. The debt brake has stood Germany in good stead.

But we’ll be left sitting on a huge mountain of debt after the coronavirus crisis, of course.

Germany can cope with this debt burden. After all, the debt ratio is still much lower than it was after the financial crisis. But yes, effective fiscal rules such as the debt brake are important if we are to reduce this debt burden again after the crisis.

But it’s completely unrealistic to stick to the debt brake requirements next year. That would leave only a tiny amount of financial leeway.

No. The existing reserves will allow consolidation to be spread over a considerable period of time. Central government has built up a reserve of almost €50 billion over the last few years. Only if the pandemic persists for an extended period might we have to discuss new exceptions.

Do we need to reconsider the existence of the debt brake?

I wouldn’t say that. Of course, we can discuss precisely how it is designed. But the debt brake is an important fiscal guardrail. I don’t see it as a brake on investment and growth, either.

Aren’t tax increases the logical solution to the enormous debt burden?

No. Like I said, I believe the debt burden is sustainable. When economic activity recovers, labour market spending automatically falls, for instance, and tax revenue bounces back. We saw this happen after the financial crisis. Besides, any budget gaps can also be plugged through spending cuts, of course. And given the uncertainty among enterprises and consumers, this really is not the best time to be discussing tax hikes that might not even be necessary.

Will Germany soon be facing a wave of insolvencies? Will we be swamped by a flood of businesses going bust?

The slump in economic activity won't show up in the insolvency figures for a few quarters yet. They will rise significantly, but from a very low level. Corporate insolvency numbers will probably languish well below their all-time high, partly because the Federal Government did a great deal to support firms.

Don’t we need to rapidly return to the principles of a market economy once the coronavirus pandemic is over? Berlin can’t prop up companies like TUI forever.

The crisis has shown how powerful market-driven solutions are. Think of the vaccines that several private sector firms have successfully developed in record time, or how quickly enterprises have switched over to producing masks. It was important for general government to intervene strongly in the crisis. But this must not become a normal state of affairs. I do not believe that governments know best when it comes to running a business.

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