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Bundesbank’s new president to battle two fronts: inflation and Europe

Summary:
This blog had pointed how Joachim Nagel has been appointed as the new President of Bundesbank after the sudden resignation of Jens Weidmann. Nagel takes over the helm at Bundesbank today on 10 Jan 2022.  David Marsh and Edoardo Reviglio in this OMFIF article writes on the twin challenges for Nagel – rising inflation and Europe. First inflation at 3.1% is higher than 2 year average of 2.6%: The priority of new German Bundesbank presidents over the past 65 years has been either fighting rising inflation or shoring up Germany’s habitually sensitive currency alliances with other European countries. Joachim Nagel, taking over on 10 January, faces both challenges simultaneously. After nearly three decades of relative calm on the prices front since the 1990s build-up to Europe’s single

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This blog had pointed how Joachim Nagel has been appointed as the new President of Bundesbank after the sudden resignation of Jens Weidmann.

Nagel takes over the helm at Bundesbank today on 10 Jan 2022.  David Marsh and Edoardo Reviglio in this OMFIF article writes on the twin challenges for Nagel – rising inflation and Europe.

First inflation at 3.1% is higher than 2 year average of 2.6%:

The priority of new German Bundesbank presidents over the past 65 years has been either fighting rising inflation or shoring up Germany’s habitually sensitive currency alliances with other European countries. Joachim Nagel, taking over on 10 January, faces both challenges simultaneously.

After nearly three decades of relative calm on the prices front since the 1990s build-up to Europe’s single currency, Nagel is the first Bundesbank president to confront an inflationary threat without full control over interest rates. His three predecessors since 1999 all started their jobs with prices rising at or comfortably below the European Central Bank’s 2% target rate.

The gap between Germany’s perceived economic requirements and its ability to act could have big political repercussions for Chancellor Olaf Scholz’s three-party coalition, as well as on delicate relations with France and Italy.

Nagel is the 11th Bundesbank president (including a short-term caretaker appointment in 2005) since the bank was founded in 1957 as the successor to Bank deutscher Länder, formed under post-second world war military occupation. He takes office after the biggest year-on-year increase in average German inflation for more than 70 years. Average consumer prices in 2021 rose 3.1% against 0.5% in 2020, which rounded off a 28 year spell when average German annual inflation never exceeded 2.6%.

Second Bundesbank can no more tighten monetary policy as it could earlier as powers lay with European Central Bank:

In the years before monetary union, the Bundesbank would habitually take action either to follow an American monetary lead or to tackle home-grown inflationary pressures. At the height of the last phase of radical German tightening in July 1992, the Bundesbank, under its steely president Helmut Schlesinger, raised its discount rate to 8.75%, the highest since 1931 – a reaction to a German boom during and after 1990 unification. Pierre Bérégovoy, the French prime minister at the time, prophetically told the French cabinet after the move: ‘If a common central bank existed for the [then] 12 states of the Community, then a decision such as the one the Bundesbank has taken would not be possible.’

Germany’s current manoeuvring room is further constrained by concerted Franco-German action to bring in permanent leeway for countries to overshoot formal deficit and debt targets laid down in the 1991-92 Maastricht treaty. There is a growing consensus that EU budgetary rules, suspended during the pandemic, should be revised, without necessitating a revision of the European treaties, before taking effect again in 2023. Progress towards a new European fiscal framework is a central goal of France’s European Union presidency which started on 1 January, with pressure building for significant progress before French presidential elections in April.

Historic parallels with Karl Otto Pöhl’s appointment in January 1980:

There are intriguing similarities between Nagel’s nomination and the accession of the Bundesbank’s internationally highest-profile leader, Karl Otto Pöhl, in January 1980. On both occasions, a German Social Democratic Party (SPD) finance minister-turned-chancellor – Scholz now and Chancellor Helmut Schmidt 42 years earlier – brought in a well-respected SPD technocrat as Bundesbank president.

Pöhl soon ran into difficulties from massive US tightening under Paul Volcker, then Fed chairman. This led to inopportune European currency weakness and Bundesbank interest rate rises culminating in a 1981-82 recession and the breakdown of the German coalition with Schmidt’s departure in 1983 – which he blamed partly on the central bank.

Depending on whether and at what pace it subsides, the 2021-22 inflation rebound could test Europe’s monetary arrangements still more than during the 2010-15 sovereign debt crisis. Europe’s political architecture has greatly changed over the past four decades. Large questions remain whether it is robust enough to overcome the strains ahead.

Political economy of central banking in Europe is ever interesting…

Amol Agrawal
I am currently pursuing my PhD in economics. I have work-ex of nearly 10 years with most of those years spent figuring economic research in Mumbai’s financial sector.

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