Axel who? The man behind the Bundesbank

Date: 22/09/05

Bundesbank chief Axel Weber tells Stewart Fleming why eurozone interest rates are low enough and what Germany's economy needs to boost its pitifully low potential-growth rate

The head of the Bundesbank is one of the most influential economic policymakers in Europe. As a member of the European Central Bank (ECB) governing council, which sets interest rates, he only wields one vote out of twelve. But since the council is known not to vote formally on interest-rate policy and since Germany's economy accounts for some 30% of the eurozone's gross domestic product, an able and credible Bundesbank president will always be one of the most influential council members.

'Axel Who?' was the headline in Germany's leading business magazine, Wirtschaftswoche, in April of last year. Chancellor Gerhard Schröder had just stunned the country's political cognoscenti by plucking a little known economics professor, Axel Weber, out of Cologne University and installing him as the new president of the Bundesbank.

Weber himself, a hobby-marathoner like former trade commissioner Pascal Lamy, has 'street cred' among central bankers around the world. An internationally recognised expert on monetary economics, he is both an articulate exponent of its complexities and an approachable figure who will happily sup a beer or two with stragglers following a late-night after-dinner speech. He also has international experience having spent half a year at the Brookings Institution think-tank in Washington as well as some time at universities in Tilburg and London.

Since taking office, he has disappointed those who hoped that he might turn out to be a bit of a maverick. Instead he has publicly adopted ECB orthodoxy.

So, in an interview with European Voice just before this month's informal Ecofin meeting in Manchester, Weber brusquely dismissed suggestions that lower interest rates should now be on the ECB agenda to promote growth.

"Real [inflation-adjusted] interest rates are already close to zero; monetary policy cannot be much more supportive," he said. "The central economic problem facing Europe is primarily structural not cyclical. This is the challenge posed by the EU's low longer-term growth potential," he went on, before adding: "I am absolutely sure that to ease monetary policy now would be misguided."

On taking office, Weber also swiftly embraced the ECB's revised "twin pillars" monetary policy - which encompasses a monetary growth rate 'reference value' and a general assessment of economic conditions - rather than aligning himself with inflation targeting advocates, as some, on the basis of comments he made as an academic, thought he might.

He shares too his ECB and Bundesbank colleagues' insistence that keeping budget deficits and national debt under control, as the EU treaty demands, is vital for the stability of the single currency.

And he has endorsed the Bundesbank's traditional concerns about the danger of encouraging the assumption that official lenders, governments or the International Monetary Fund (IMF) for example, will bail out countries (and bankers) who get into financial difficulty - creating so-called moral hazard.

He has also taken a pot-shot at British Chancellor Gordon Brown's favourite aid policy, debt relief for the poorest countries. "Above all, one might question if further debt relief rightly deserves such a prominent place on the international development agenda. Net flows, not debt relief, matter," he told a conference in Frankfurt.

As for the outlook for the German economy, he is quick to damp down what he seems to see as excessive optimism about the immediate prospects for a strong recovery.

Reflecting its well-known structural problems and inflexible labour markets, "Germany's long-term economic growth potential is currently only about 1.5%," he says, "well below the 2.5% of the 1980s and 1990s." This means that Germany is "more vulnerable to external economic shocks" than it should be, he explains.

Germany's exports have benefited from the buoyant world economy and he thinks domestic investment will continue to strengthen. But he still only expects German growth this year to be a paltry 1% in calendar and workday adjusted terms. This is in line with the IMF's assessment that growth this year could be 0.8% and some private sector economists, such as investment bankers Lehman Brothers, are saying there will be little, if any, recovery next year.

"We need domestic demand to pick up and that strongly depends on income dynamics, so we need to resolve some of our unemployment problem," he says. Germany's army of unemployed is just under five million, over 11% of the labour force.

But while he highlights the importance to Germany of pushing on with the reforms which fast changing, increasingly competitive, global markets require, he is quick to point out that "Germany's unions have been very responsible in an era of quasi-stagnation".

Low-wage settlements have helped German firms to gain competitiveness in European and world markets, boosting exports to China and the US.

But he maintains that the German government's reform programmes must be "balanced, interlinked and consistent", by implication suggesting this has not, hitherto, been the case.

He argues that one-off reforms which create uncertainty, which make it easier for employers to shed jobs without making it easier for workers to find new employment, or which leave consumers in doubt about their long-term pensions entitlements or health benefits, damage confidence.

"Governments must commit to medium-term reform strategies in order to boost confidence," he insists.

One subject he will not be drawn on is speculation that he might, next year, replace Otmar Issing as Germany's man on the ECB's managing board.

Some who know him say he believes that he can have as much influence at the ECB as Bundesbank president sitting on the governing council as he would as a member of the managing board, where, rumour has it, some of Issing's responsibilities as chief economist may yet be reshuffled.

Certainly, leading the Bundesbank, which still has over 900 of its 13,000 staff engaged in helping supervise German banks, provides the lifelong academic with a golden opportunity to expand his professional experience.

Demonstrating that he can successfully manage such a complex organisation can only boost his career prospects.

Stewart Fleming is a freelance journalist based in Brussels.

Article is based on an interview with Axel Weber, head of the German Central Bank, the Bundesbank.

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