The New Bundesbank Chief’s Views on Key Issues Facing the ECB
(Bloomberg) -- There’s plenty to suggest Germany’s newest addition to the European Central Bank’s Governing Council won’t stray far from the Bundesbank’s traditional conservatism.
Joachim Nagel, who arrives from the Bank for International Settlements, has already spent more cumulative years working for the German central bank than outgoing President Jens Weidmann, who’s embodied the institution’s aversion to inflation and unease at unconventional tools like quantitative easing.
Nagel was no silent sidekick during the five years the pair overlapped on the Bundesbank’s executive board, locking horns occasionally with Weidmann after commenting on monetary policy from his role as head of market operations. But the two men’s views never clashed.
For the new German government that picked him on Monday, Nagel’s experience and ability to deliver continuity will be key in leading the central bank of the European Union’s biggest economy. “Considering the risk of inflation, stability-oriented monetary policy is of increasing significance,” Finance Minister Christian Lindner said.
Perhaps the biggest question mark is whether any of Nagel’s opinions have shifted in the five years since he last worked at the Bundesbank -- when he made the bulk of his public comments on key ECB topics. Here’s a selection for investors and economists trying to gauge his views.
Nagel was promoted to the Bundesbank’s executive board in late 2010 after previously leading one of its central divisions, a rare move as appointees to the panel are typically hired externally. His responsibilities included financial markets, and therefore put him in charge of implementing the ECB’s monetary policy when the institution launched large-scale bond purchases.
During this time, he was often critical of the tool. The same week the ECB’s asset-purchase program, or APP, began in March 2015, Nagel warned of the balance-sheet and taxpayer risks it posed:
“With such a purchase program, especially if it also involves bonds with a negative yield, balance-sheet risks are a given. .... It is not the task of the Eurosystem to generate a certain amount of monetary income. At the same time, the Eurosystem has no mandate to use its policy to target redistribution of financial risks between taxpayers in the member states.” -- March 15, 2015, FAZ interview
He also cautioned about the need to exit bond-buying sooner rather than later:
“In March 2017, the Eurosystem will hold member states’ government bonds worth around 1.3 trillion euros. .... The implications of this for central bank independence are already being discussed. A timely exit from expansionary monetary policy should not be put off because it would lead to increasing financial burdens for member states.” -- February 1, 2016, op-ed
Outright Monetary Transactions
The OMT program was the ECB’s flagship tool for fighting the euro-zone debt crisis in 2012 under then-President Mario Draghi. While it’s never been used, it’s played an important role in underpinning financing costs in weaker members of the currency bloc by envisaging potentially unlimited debt purchases in exchange for compliance with economic measures.
The program’s relevance has arguably diminished since officials proved their ability during the pandemic to pursue highly flexible bond-buying with no strings attached. But debates about the conditionality of future debt purchases are likely to re-emerge after the crisis.
OMT was heavily criticized by Weidmann, and Nagel himself said in 2013 that he hopes it will never be used.
“Refinancing conditions for the peripheral countries have improved notably. Hence, hopefully OMT will never have to be activated. .... The Bundesbank’s concerns are still extremely relevant.” -- September 26, 2013, Frankfurt
Low Interest Rates
While more vocal on bond purchases, Nagel has also noted the challenge that years of low interest rates poses for savers. He’s called the environment “problematic” for banks, particularly as their inability to pass negative rates on to consumers hurts profits. And he’s said low rates set the wrong incentives for governments, while triggering risks of stock and real-estate bubbles by prompting investors to search for higher-yielding assets.
“The ever stronger interplay between monetary and fiscal policy is controversial. Low interest rates reduce the pressure on governments to consolidate their national budgets and adjust their structures.” -- February 1, 2016, op-ed
Nagel appears to generally take a more conservative approach on how central banks should respond to macroeconomic challenges. In 2014, as Draghi warned of euro-area deflation risks and prepared measures to fight them, Nagel argued that deflation was “not the correct term to use at this point.” Two years earlier, he elaborated on his view on how central banks should behave during crises:
“Central banks are usually conservative. Their public mandate -- to guarantee price stability -- does not require maximizing returns while accepting risks. On the contrary, risks can damage central banks not only financially, but also their reputation.” -- November 2, 2012, Boersen-Zeitung op-ed
During a four-year stint at Germany’s KfW development bank -- which followed his last Bundesbank appointment -- Nagel worked at the forefront of one of the world’s largest climate financiers.
President Christine Lagarde has shown a passion for strengthening the ECB’s role in combating climate change. While Nagel hasn’t commented on the role he sees for monetary policy, he knows first-hand what it takes to finance the transition to a greener economy, as well as the accounting challenges for banks in estimating the carbon effect of their activities. He also claimed, proudly, in 2019 that his company car was electric.
“The topic is currently experiencing a gratifying dynamic. Nevertheless, we still have to accelerate our efforts significantly. After all, it is about changing the global economy in the long term. We cannot and must not leave the main burden of climate protection to the next generation.” -- December 6, 2019, in interview
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