1 Welcome

Minister Eisenmann,
Dr Völter,
Mr Sibold,
Dr Staab,
Dear guests,

I would like to wish you a warm welcome to this ceremony to mark the change of presidential office at the Regional Office in Baden-Württemberg. The fact that so many of you have taken up our invitation is a clear reflection of the high regard in which you hold Mr Siebold, in particular. While I’m delighted to see it, I’m not surprised – I share your sentiments. 

You were probably more surprised to see rap duo Kleister make an appearance. No doubt you wouldn’t have expected the Bundesbank to kick off an event with a musical number of that kind. I’d like to take the opportunity at this point to thank the musicians for their impressive performance and add, without giving away too much, that it was Mr Siebold who suggested Kleiser. He will tell us what that’s all about later. The song performed just now was called “Retrospective”, which is also the key theme of my speech.

2 Bernhard Sibold’s career path

Mr Sibold, your choice of music makes one thing clear: even at the end of your long, 39-year career at the Bundesbank, you’re still open to new ideas. Sticking to the tried and tested out of sheer convenience was never your thing. On the contrary, you were always a prudent shaper of changes, true to the motto that “there can be no improvement without change”.

Your first encounter with the Bundesbank was all the way back when you were a banking apprentice when, in the early 1970s, you used to transport six-figure sums of Deutsche Mark from your Volksbank branch to the local Bundesbank branch. Nowadays, those in charge of such deliveries feel the need to take greater security precautions than simply entrusting their cash to a young man who, while no doubt very athletic, was somewhat unprepared for such a task.

After performing military service and studying business administration at the University of Mannheim, you started out as a trainee civil servant at what was then the Land Central Bank in Bavaria. You moved to Stuttgart in 1993. Of the 26 years you spent there, you were Regional Office President for 14. When you assumed this office, Gerhard Schröder was still Federal Chancellor – just to provide a little context. You successfully managed to avoid working at the Bundesbank’s Central Office for any great length of time for your entire career. Looking at you, it seems to have done you good. 

Your career was eventful enough at any rate – after all, you experienced, and helped shape, three significant developments across the country. When the new German federal states were integrated into the Bundesbank system in 1992, some Land Central Banks became responsible for multiple federal states for the first time. At the same time, the number of Land Central Banks was cut from 11 to 9. You were more of an observer in Bavaria as this consolidation was taking place.

What was more of a game-changing period, both for the Bank as a whole and for you, was the structural reform that came ten years later. You made the necessary adjustments in response to the creation of the Eurosystem. Mr Sibold, you were in Stuttgart at that time and drove the Bundesbank’s transition to a modern and efficient organisation, all without losing sight of the needs of the staff.

Another 12 years later, in November 2014, the Single Supervisory Mechanism was set up. Representing the Presidents of the Regional Offices, you were involved in the Executive Board’s discussions on how to implement the new supervisory regime within our Bank, and you injected a wealth of expertise and sound reasoning into proceedings. Today, after almost five years under the new regime, it’s safe to say that your efforts have paid off. The quality of supervision has reached a new level, and the Single Supervisory Mechanism is an important pillar of European integration.

But you didn’t just work behind the scenes. Quite the opposite, in fact: you worked in the public arena as an extremely committed ambassador of the Bundesbank, and you were the voice and face of the Bundesbank in Baden-Württemberg. The financial centre was especially close to your heart. With that in mind, you started a new event series in 2001 entitled “Visiting the Bundesbank”. Taking place several times a year, it brings a number of financial market actors together to exchange views, an activity that is truly valuable – in Stuttgart as well as at the branches. I’m sure that Dr Völter will take a closer look at your commitment to the financial centre as a member of Stuttgart Financial’s Advisory Board momentarily.

3  Possible causes of muted inflationary pressures 

Part of your job as an ambassador of the Bundesbank was also to explain monetary policy and price developments. Looking back over your long period of service, it’s safe to say that times have changed drastically. When you joined the Bundesbank, the inflation rate here in Germany was over 5% in the wake of the second oil price shock. It was even higher in other European countries, going so far as to hit double figures in the United States. At that time, then Fed Chairman Paul Volcker had just set about reining in inflation.

At the current juncture and in the more recent past, we’ve had the opposite problem: instead of too much inflation, we are unable to reach the target we’ve set ourselves due to excessively low domestic price pressures. Since 2013, consumer prices in the euro area have been rising by an average of 0.9% per year. In the period from 2014 to 2016, average annual inflation was as low as 0.3%. At first glance, these subdued inflationary pressures probably seem harmless to you, the general public. You are perhaps surprised at central bankers’ quest to achieve higher inflation and at the mammoth task that this presents. But the ECB Governing Council set itself an inflation target of below, but close to, 2% over the medium term. If inflation consistently fails to meet this target, there is a risk of our monetary policy losing credibility and of inflation expectations sinking. If nominal interest rates remain unchanged, real interest rates will then rise, putting the economy under additional pressure and potentially causing price pressures to wane even further. What's important for me though is that the ECB Governing Council made a point of not elaborating further on what it meant by “medium term”. The intention here is to give us the flexibility to take account of various time-lagged effects and, if need be, to simply wait if there are good reasons why price pressures are rising only gradually.

In recent years, the sharp decline in crude oil and other commodity prices has certainly contributed to low inflation rates from time to time. However, core inflation – that is, inflation excluding food and energy, also took a noticeable hit. One major cause of this was the legacy of the financial and sovereign debt crisis[1]. Unemployment in the euro area peaked at a rate of 12% in 2013. This curbed wage growth, particularly since one of the ways in which the hardest hit economies improved their competitiveness was by moderating wages. But it isn’t just in the euro area, but in other developed economies, too, that inflation appears to have more or less disappeared: there is talk of “missing inflation”. 

Looking beyond cyclical causes, it raises the question as to whether underlying relationships and determining factors have shifted. It is also at this point that far-reaching changes such as digitalisation and globalisation are cited time and again.

Just imagine: when Mr Sibold started at the Bundesbank in Munich back in 1980, it didn’t have a single PC. The Bank was by no means behind the times, though, as the first IBM Personal Computer didn’t come onto the market until 1981. Anyhow, the first PC was purchased in 1984 and, a year later, Mr Sibold was required to explain in a multiple-page memo why it made sense to procure a second PC for the Land Central Bank in Bavaria. I would like to quote a passage from this four-page memo as it wonderfully illustrates the vision and openness towards new technologies that Mr Sibold has demonstrated over his entire career. His argument back then was as follows: “Our experiences with the PC installed in December 1984 have been positive. [...] The PC as an instrument for work doesn’t just give us the opportunity to perform our current tasks more effectively on the whole – it also makes it possible to approach problems to which a solution has previously appeared unrealistic.”

In the meantime, digital technologies have become ubiquitous – both at work and in our personal lives. This would suggest that they affect price movements, and that they do so in a variety of ways. Indeed, previous studies have indicated that digital transformation has probably had a dampening effect on inflation, on balance. However, this overall impact is considered quite small[2].  This is down to the fact that effects transmitted via individual channels occasionally pull in opposite directions. First of all, digital technologies make enterprises more productive. They can produce at low costs, which, in an environment where competition is effective, leads to lower prices for the consumer. Higher market transparency means more competition as well as higher margin and price pressures. This is because consumers have an overview of the entire market in just a matter of clicks. That said, we are currently observing a tendency in digital markets towards natural monopolies stemming from network effects. The more users a certain platform has, the more attractive it becomes to other users. This gives rise to superstar firms that can harness their market power to push through higher prices.

In addition to digitalisation, globalisation has probably also had an impact on price pressures. It has brought with it new competitors from the emerging market economies, and the volume of global trade has increased more than sevenfold since 1980. This begs the question: to what extent do traditional relationships, such as that between wages and prices, still exist? The Bundesbank poses this particular question with reference to Germany in the latest issue of its Monthly Report[3].  

Note that higher wages do not automatically lead to higher prices. After all, enterprises can respond to wage rises in any number of ways. Raising prices for consumers is just one option. Businesses may also accept tighter profit margins or cut labour input and hence costs. To gauge what behaviour is typical, econometric analyses are required. They find that a 1% rise in wage costs in Germany increases consumer prices by around 0.3%. 

And this pass-through has in fact become weaker since the 1970s. This could be down to a variety of factors, including heightened competitive pressure due to globalisation. Since the financial crisis of 2007-08, however, the transmission has weakened only a little, and has been broadly stable lately. 

Our analyses also show that the transmission of higher wages can take several years. With that in mind, the slow strengthening of inflation shouldn’t really be a surprise to us at the moment. An ECB study shows that this is also the case for other major euro area economies.[4] In a low inflation setting, transmission could even take a little longer than it would under normal circumstances.

On the whole, then, there is much to suggest that the strengthening of wage growth in Germany in recent years, as in the euro area of late, probably contributed to a gradual increase in price pressures. Taken in isolation, this will bring the inflation rate more into line with the Eurosystem’s policy objective.

4 Economic activity and monetary policy

Macroeconomic growth has slackened considerably since the start of 2018, however. This is truer of Germany than it is for our partner countries in the currency union. Above all, global investment activity and world trade have lost momentum, and this is hitting Germany’s export-based industry especially hard. The tensions in international trade policy are, not least, a source of strain on the global economy. On the one hand, newly introduced tariffs are directly constraining cross-border flows of goods. On the other hand, the disputes are undermining business confidence in enterprises. The ongoing uncertainty is being amplified by other political risks. For example, there is still the risk that the United Kingdom could leave the European Union without a deal. And the recent attack on the oil industry in Saudi Arabia highlights the risks posed by simmering geopolitical conflicts.
The sluggish growth in foreign business stands in contrast to the sustained improvement on the labour market in the euro area. The unemployment rate fell to 7.5% up to July, putting it only 0.2 percentage point off its pre-crisis low. Continued employment creation and rising wages are supporting growth in consumption. At the same time, households and enterprises are benefiting from current financing terms, which remain extremely favourable.

Two weeks ago, the ECB’s economic experts revised the projections for euro area economic growth downwards slightly. Thus, they expected a marginally slower strengthening of inflation than had been anticipated just a little while earlier. A sustainable return to an inflation rate in the target range of below, but close to, 2% is therefore receding further into the future.

Against this backdrop, the Governing Council of the ECB again loosened the already very expansionary monetary policy stance. Amongst other things, the Governing Council clearly indicated that an increase in interest rates was not to be expected for quite some time to come, and the deposit facility rate was reduced by a further 10 basis points to -0.5%. Given the bleaker inflation outlook, I consider the interest rate move to be appropriate. However, the Governing Council adopted a package of measures which, in its entirety, I regard as a step too far. In this case, I am critical, in particular, of the resumption of net asset purchases, which are also intended to drive the interest rates on long-term bonds further into negative territory. The large-scale purchases of government bonds threaten to blur the lines between monetary policy and fiscal policy. The disciplining effect of market forces on fiscal policy will be increasingly watered down, and incentives for sound budgets will dissipate.

5 Central bank independence

Central banks have now become the euro area countries’ biggest creditors. The growing convergence of monetary and fiscal policy is a thorny issue, especially as regards central bank independence; some of the contingency measures taken in recent years have also posed political temptations. “The independent central bank: an outdated model” was the headline chosen by the “Börsenzeitung” for a recent article – without a question mark, I might add.[5] 

Against this backdrop, let’s take one last trip back in time. When Mr Sibold started out in his career, the independent central bank was the exception rather than the rule. But it was the 1970s – the time of the Great Inflation – that showed that independent central banks are better able to keep inflation under control than politically run central banks. At an average of 5%, inflation was certainly quite high back then, even in Germany, but was significantly lower than in other advanced economies – with the exception of Switzerland, which also had a very independent central bank. In the United States, for example, inflation averaged 8%, in France it was 10%, in Italy and in the United Kingdom 14%. These experiences were also one reason why, in the next two decades, many central banks were given the mandate to safeguard price stability and were also made independent. After all, the more influence politics has over central bank decisions, the greater the risk of the central bank making compromises to the detriment of price stability.

Yet politicians in a number of countries are now making ever greater attempts to influence monetary policy and to harness it for purposes other than ensuring price stability. They do this, for example, by explicitly calling for monetary policymakers to finance investment in the economy’s green transition, or by putting the case for Modern Monetary Theory, with the attendant fiscal dominance. I don’t even want to mention the US President’s Twitter tirades. 

Some parties evidently believe that central bank independence is superfluous in this day and age. They argue that the classic conflict between price stability and other economic policy objectives has become less important, saying that monetary and fiscal policy are no longer opposites, both should act in concert, and monetary policymakers should bow to politicians. This argument clearly fails to recognise that the overlapping interests are not permanent. When price stability is restored, at the very latest, monetary policymakers have to be able to make the autonomous decision to wind down the monetary policy stimulus. And it would be naive to believe that politicians would then relinquish their influence over the central bank or give precedence to the objective of price stability of their own accord. That is why independent monetary policymakers with a clear mandate remain a key foundation on which to ensure price stability in the future as well.

Bearing this is mind, it is all the more important for central banks to stick to a narrow interpretation of their mandate. In principle, you see, an independent public sector institution is in fact a foreign concept in a democracy. An exception is made especially for the objective of price stability. If the mandate were interpreted broadly, independence would sooner or later be called into question, and rightly so. 

6 Conclusion

Ladies and gentlemen, let me finish here, but not without giving my heartfelt thanks to you, Mr Sibold. I’m sure everyone in this room has always known you to be a highly responsible and passionate Bundesbanker. You have represented the Bundesbank in Baden-Württemberg with a great deal of conviction and charisma. Thanks to your extraordinary commitment, you have gained much respect and recognition here and throughout the Bundesbank as a whole, while always showing great appreciation for your staff. You listened to them and got things under way together. Here in Stuttgart, you’ve already been practicing the kind of leadership for a long time that has been so important to me since the beginning of my first term of office and that we have anchored deeply in the Bank in the form of our management principles. On behalf of the Executive Board, I’d like to give you my warmest thanks for almost 40 years spent serving the Bundesbank and a stable currency. Your successor, Dr Staab, will inherit a very well-functioning regional office with its six branches. And you will leave behind a finely woven Bundesbank network. 

Dr Staab, I wish you every success in your work here in Stuttgart. Given how open-minded, communicative and hands-on you are, you already bring key personal traits to the table. You’ve made a name for yourself when it comes to digitalisation. And the title of your third book, which you’ve just published with the Bundesbank’s Director General Statistics, Mr Stahl, also reflects your hands-on approach. That title is “Donʼt worry, be digital”. An attitude that will surely be helpful to the Bundesbank in the digital transformation.

Mr Sibold, it’s hard for me to imagine the Bundesbank without you. But I hope that you yourself can imagine a life without the Bundesbank. On the one hand, you’ll still be using your analytical and communication skills as Chair of the Board of Trustees of the University of Tübingen. You were known in the Bundesbank as a connoisseur of the regional cuisine and a renowned wine lover, so on the other hand you’ll have more time to indulge your love of art, culture and culinary delights. Let me return to the musical number at the beginning. The lyrics said: “Yeah, people come and go, yeah, time never stops. […] Don’t lament the loss of time. […] Let’s use the blue hour.” The blue hour, that twilight period, is a transitional phase. You now have a transition ahead of you, Mr Sibold. And I hope that it is a transition to a fulfilling retirement.

Thank you very much for listening.

Footnotes:

1. Ciccarelli, M. and C. Osbat (eds., 2017), Low inflation in the euro area: causes and consequences, ECB Occasional Paper, No 181.
2. Ciccarelli, M. and C. Osbat (eds., 2017), op cit, Box 3; Charbonneau, K., A. Evans, S. Sarker and L. Suchanek, Digitalization and Inflation: A Review of the Literature, Bank of Canada, Staff Analytical Note, 2017-20.
3. Deutsche Bundesbank, The impact of wages on prices in Germany: results of selected empirical analyses, Monthly Report, September 2019, pp. 15-39.
4. Bobeica, E., M. Ciccarelli and I. Vansteenkiste (2019), The link between labor cost and price inflation in the euro area, ECB Working Paper Series No 2235.
5. Börsenzeitung, 24 August 2019.