The EconomistFebruary 22nd 2020 611F
rankfurt is blessedwith not one but
two central banks. In the north loom the
brutalist headquarters of the Bundes-
bank—a raw-concrete structure that is
three times wider than it is tall. Ascend to
its higher floors and you get a splendid
view of the city’s skyline to the south—in-
cluding a gleaming glass tower completed
in 2014. This is the European Central Bank
(ecb), which in 1999 supplanted the
Bundesbank as the monetary policymaker
for Germany and much of Europe. Deci-
sions made at the Bundesbank once sent
tremors through the continent’s financial
markets. Now, like the central banks in oth-
er euro member states, it has one seat out of
25 on the ecb’s governing council.
Though the ecbbegan life modelled on
the Bundesbank, the past decade or so has
seen fierce clashes between the two insti-
tutions over monetary policy. The hawkish
Bundesbank sat on the sidelines as doves at
the ecb, led by Mario Draghi, its boss in
2011-19, enacted extraordinary monetary
stimulus. Now the Bundesbank is at an im-
portant moment. The euro-zone economyis floundering again and the German pub-
lic is increasingly mistrustful of ecbpolicy,
suggesting the risk of further fights over
monetary loosening. But the arrival of a
new boss, Christine Lagarde, at the ecbin
November, and her year-long review of the
ecb’s strategy, provides the Bundesbank
with a chance to regain some influence
over monetary policy.
The Bundesbank came into being in
1957 with a laser-like focus on monetary
stability. Time and again it exercised its
prized independence from politicians,
provoking recessions in order to tame in-
flation. On its watch Germany had lower
inflation than in other rich countries,
prompting many in Europe to peg their
currencies to the Deutschmark. By the
1990s, many saw a common currency as a
way to harness the bank’s credibility.
In order to sell the idea to the German
public the ecbwas located in Frankfurt. It
also drew on German expertise. Otmar Iss-
ing, its first chief economist, and the archi-
tect of its strategy, was an old Bundesbank
hand. Under him the ecbbegan life with a“reference value” for money-supply
growth and a flinty view of inflation.
In some respects the Bundesbank still
has heft at the ecb. It brings expert knowl-
edge on the euro area’s largest member
state to the ecb’s governing council. That is
in part thanks to its 10,000 employees,
nearly three times as many as the ecb(see
next page). Germany’s size, and Frankfurt’s
status as the euro area’s biggest financial
centre, also means that the Bundesbank
plays an outsize role in the euro system.
Together with its Italian counterpart it
maintains the infrastructure for target2,
which settles high-value payments be-
tween national central banks. Germany’s
target2 system processes half of the vol-
ume of payments made in the euro area.
But when it comes to monetary-policy
decisions, the Bundesbank has suffered a
loss of influence. The ecb’s reference value
for money supply has fallen by the way-
side. A German has always occupied one of
the six seats on the ecb’s executive board.
But a Harvard-educated Irishman is now its
chief economist; other top officials include
a Belgian and an Italian.
Once admired for its willingness to act,
in the past decade or so the Bundesbank
has sought inaction. Mr Draghi derided its
boss, Jens Weidmann, as saying “Nein zu
allem” or “no to everything”. Various bond-
buying programmes have gone ahead de-
spite its objections.
In part the dissent stemmed from an
old-fashioned view of inflation. The ecb’sThe BundesbankSpheres of influence
FRANKFURT
Germany’s central bank once reigned over Europe. Now it finds itself caught
between doveish ecbpolicies and a public that is mistrustful of themFinance & economics
62 Bloated central banks
63 HSBC pivots east, again
63 Michael Milken is pardoned
64 Buttonwood: The cash bug
65 Tracing cross-border capital flows
65 Student debt in America
66 Free exchange: Responding to
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