Bundesbank President Jens Weidmann takes a dim view of the new US administration's economic policy signals. "Accusations that Germany is taking advantage of the United States and other countries with an undervalued currency are more than absurd," Dr Weidmann told an audience of more than 2,000 at a business community reception in Mainz.

© IHK Rheinhessen/ A. Sell

He explained that Germany's economy is highly competitive not as a result of a manipulative exchange rate policy, but that "German enterprises are above all competitive because they are excellently positioned in global markets and boast innovative products". Dr Weidmann conceded that the external value of the euro is also a factor, noting how the exchange rate is being dampened by an accommodative monetary policy, which has not been undisputed in Germany. Yet the single monetary policy is "geared not to the above-average economic situation in Germany, but to the weaker euro-area average," he remarked.

Fresh uncertainty

The Bundesbank President took a critical line on the new US administration's policy stance. "In any case, I find the protectionist rhetoric coming out of Washington very worrying, especially as Germany is increasingly in the sights of the US [administration]." The shape and possible repercussions of future economic policy in the United States are sparking fresh uncertainty, he said. There may have been plaudits so far in the markets, but traders have largely turned a blind eye to the economic damage that would be wrought by looming trade barriers and an increasingly interventionist economic policy. "And yet open markets and a competitive economic system are the very qualities that underpin our prosperity," he told his audience. He also pointed to the volume of German foreign direct investment in the United States, which comes to around €270 billion across 4,700 US businesses with more than 800,000 employees. "If I may use a piece of business jargon, that looks to me like a win-win situation," Dr Weidmann said.

The Bundesbank President also used his speech in Mainz to comment on the criticism levelled at Germany's current account surpluses. Because of the foreseeable demographic change, these surpluses are quite appropriate at the present time, he stated, as this is how Germans provide for old age, amongst other things. Dr Weidmann explained that the current surplus of more than 8% of GDP cannot be put down to demographics alone, though, noting that the low oil price, which has diminished the cost of imports, also explains part of the high surplus.

Strengthen independent national responsibility; don't keep the monetary policy gas pedal to the floor

The Bundesbank President also used his speech to mark the 25th anniversary of the Maastricht Treaty, which, he said, had created the regulatory framework of European monetary union and enshrined key principles such as sound public finances, a ban on monetary financing and the prohibition of mutual bailouts by member states. Yet these principles had proven unable to prevent the sovereign debt crisis in the euro area, Dr Weidmann explained, adding that the euro rescue packages and Eurosystem measures were the only way to ultimately prevent the crisis from escalating. This, he said, had put the relationship between actions and liability for their consequences out of kilter. "If we want to preserve monetary union as a union of stability, we have to strengthen the principle of independent national responsibility," Dr Weidmann remarked.

The Bundesbank President also reiterated his misgivings over the Eurosystem's current ultra-accommodative monetary policy, which, he said, cannot resolve the deeper-seated problems weighing on Europe and needs to be brought to an end as soon the objective of price stability permits. On this latter point, Dr Weidmann told his audience that the rate of inflation in Germany, and in the euro area, too, has increased of late. Eurosystem projections suggest that the rate of inflation will pick up gradually and move into the target range of below, but close to, 2% on a lasting basis in 2019. "In my view, recent price developments clearly show that deflation – that is to say, a downward spiral of falling wages and prices, which was conjured up by some in the past and used to justify the purchase of government bonds – is now a mere blip on the distant horizon," he said.

An expansionary monetary policy stance is appropriate in this setting, Dr Weidmann noted, but "one can certainly wrangle over whether we should be keeping the monetary policy gas pedal to the floor". He explained how the extensive purchases under the Eurosystem's current programme have transformed central banks into the member states' largest creditors. "This has thrust monetary policymakers deep into the realm of fiscal policy – in my view, too deep," he concluded.