All central banks benefit from debate. But the ECB's stand-off with the Bundesbank risks a botched response to the next recession
economic institutions have been as successful as the Bundesbank. Its tough stance on inflation in the 1970s ensured that, while the world battled double-digit price rises, those in Germany were relatively contained. Its credibility with the public and markets was so strong that other countries were keen to harness its might, leading to the creation of the single currency in 1999.
Like most Germans, the Bundesbank has a horror of debt-monetisation and an aversion to inflation. Its austere philosophy has come into conflict with the’s efforts to hold the euro together and prop up growth. In a court case in 2013 Jens Weidmann, the Bundesbank’s boss, gave evidence against Mr Draghi’s commitment to do “whatever it takes” to save the euro through unlimited bond purchases . By the end of Mr Draghi’s term, the quarrel seemed personal.
last autumn prompted a backlash in the German press. Mr Weidmann has supported rate cuts, but German public opinion has turned against theAll central banks benefit from debate—indeed, some could do with more of it. But the stand-off could harm the. When a downturn strikes, it cannot afford to be side-tracked by infighting. And recession is an ever-present risk.
A more insidious risk is a leaching away of faith in the single currency from its largest member state. That would be a disaster, undermining the viability of the euro in the long run, and posing a mortal threat to both theBoth sides have work to do. The Bundesbank is entitled to its own philosophy. But it needs to accept that the facts have changed. Its fears that loose monetary policy would cause a surge in inflation have not materialised.
So far the signs are promising. Ms Lagarde’s arrival makes it easier to leave behind the emotional baggage of the Draghi era. She has vowed to be more inclusive and launched a wide-ranging strategy review. This is an opportunity for Mr Weidmann. To his credit, he has become less uncompromising, saying last year that’s toolkit, and cautioning against Germany fetishising its own fiscal rules.
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