Working Paper No 429 Bad for Euroland Worse for Germany The ECB s Record by J rg Bibow November 2005 Franklin College Switzerland Via Ponte Tresa 29 CH 6924 Sorengo jbibow fc edu This paper was presented at the conference Germany s Economic Performance From Unification to Euroisation in London on April 29 2005 I thank the participants for their comments and RaeAnn Moore for computational assistance The Levy Economics Institute Working Paper Collection presents research in progress by Levy Institute scholars and conference participants The purpose of the series is to disseminate ideas to and elicit comments from academics and professionals The Levy Economics Institute of Bard College founded in 1986 is a nonprofit nonpartisan independently funded research organization devoted to public service Through scholarship and economic research it generates viable effective public policy responses to important economic problems that profoundly affect the quality of life in the United States and abroad The Levy Economics Institute P O Box 5000 Annandale on Hudson NY 12504 5000 http www levy org Copyright The Levy Economics Institute 2005 All rights reserved ABSTRACT This paper assesses the contribution of the European Central Bank ECB to Germany s ongoing economic crisis a vicious circle of decline in which the country has become stuck since the early 1990s It is argued that the ECB continues the Bundesbank tradition of asymmetric policymaking the bank is quick to hike but slow to ease It thereby acts as a brake on growth This approach has worked for the Bundesbank in the past because other banks behaved differently Exporting the Bundesbank success story to Euroland has undermined its working however given its sheer size Euroland simply cannot freeload on external stimuli forever While Euroland cannot do without proper demand management the Maastricht regime and especially the ECB are firmly geared against it The ECB s monetary policies have been biased against growth and have thus proved bad for Euroland as a whole Meanwhile the German disease of protracted domestic demand weakness has spread across much of Euroland Yet by pursuing its peculiar traditions of wage restraint and procyclical public thrift the ECB s policies have had even worse results for Germany Fragility and divergence undermine the euro s longterm survival Key words German unification Bundesbank policy inconsistency stability culture ECB EMU JEL classifications E31 E42 E58 E61 E63 E65 E66 H62 OF THE GRAND IDEA OF A GERMAN STYLE EMU BUNDESBANK TRADITIONS AND WHAT MAASTRICHT REALLY MEANT The idea of establishing an economic and monetary union in Europe goes back a long way to almost the beginning of the post WWII era reaching a first peak with the famous Werner Plan of 1970 It may be fair to say though that Germany was never at the forefront of this movement towards a single European currency In the age old dispute between the so called economists and monetarists both Germany s economics profession as well as political authorities championed the coronation theory according to which a common currency had to be the gracious final step in a drawn out process that could only be risked if economic and political integration had been firmly achieved beforehand Germany s acclaimed guardian of monetary stability the Deutsche Bundesbank represented a stronghold of this view And suspicions of the bank s fierce opposition to EMU were never far from the surface abroad and at home For good reason some would say this influential institution was never too keen to lose its powerful grip on monetary affairs in Germany and Europe too While the complacent view that what was good for Germany had to be good for the rest of Europe too may have been popular in Germany much of the rest of Europe found Germany s monetary hegemony increasingly intolerable and quite understandably so In the second half of the 1980s in the context of the Single Market Programme and as the BasleNyborg agreement confirmed the deutschmark s status as the anchor currency within the hard EMS the idea of replacing the unloved outside of Germany hegemon attained new strength Europe was lucky that not all German leaders were unsympathetic to the idea as the Genscher memorandum of 1988 showed Helmut Kohl s part in getting the Bundesbank aboard and the euro afloat cannot be overrated In any case it was probably always clear to the German mind that if Germany were ever to give up its beloved deutschmark at all the successor would have to be at least as hard and strong and sound as the deutschmark itself ever was From a German perspective the prospect of a successful EMU always featured exporting the Bundesbank cum deutschmark success story to Europe as a sine qua non The Delors Commission with Bundesbank president KarlOtto Poehl in charge set the scene And while a number of details may have been compromised on at the Maastricht negotiations of 1990 91 reflecting the fact that views and predispositions in the rest of Europe were in many cases fundamentally different ones 1 essentially Germany got its way in the end In a nutshell if German monetary hegemony was to be overcome Europe simply had to swallow Germany s conditions or the Bundesbank s for its own abdication that is Not only was the ECB modelled on the Bundesbank Germany s acclaimed guardian of monetary stability provided the blueprint for the structure of monetary policy in EMU The ECB s independence even surpasses the Bundesbank s secured at the constitutional level rather than just by a simple law In addition under the Bundesbank s former chief economist Otmar Issing the pursuance of a stability oriented course was guaranteed too as was the adoption of other Bundesbank traditions The ECB s overall autocratic style and peculiar public relations is a case in point featuring a passion for continuous public criticisms of issues relating to any other policy area paired with the standard dismissal of any criticism of its own policies and practices as an attack on its all important independence 1 To make the case really watertight the ECB was to be further protected from fiscal policy by a Stability Pact that would keep finance ministers fingers firmly away from the printing press Clearly the presumption in all this was that by exporting Germany s success model this would work even better both for Europe as well as for Germany itself Alas this is not the way things have played out since 1999 which raises the question why not
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