Let’s abolish the Bundesbank!

There is a bit of brouhaha about the Bundesbank’s deposition before the German constitutional court, arguing that the ECB goes beyond its mandate with policies like the OMT, in the direction of monetary financing of governments, which is explicitly banned under the treaties that establish the ECB.

The debate is generally spurious: the fluidity of money is such that you cannot devise an enforceable mandate in the common sense of the word. Whatever the rule book says, you could devise a transaction or set of transactions that respect the letter of the rule but not the spirit. Defining what is monetary financing itself is similarly virtually impossible: if the central bank makes policy that results in a vibrant economy, this increases taxation receipts and decreases fiscal expenses (or conversely), is that monetary financing? It does certainly achieve the same effect! It both always and never is, and it doesn’t matter once you have accepted that a central bank is an agency of government and that in any case it cannot not have a monetary policy (the central bank always sets the quantity and flows of money in a fiat currency system, by definition). What the ECB does is really what is politically acceptable, both within it (the governing body must come to an agreement) and without it (what the member state politicians, who can change the law if they really mean it, allow it to do). Like many institutions, it is better understood through its governance structure rather than its notional mandate.

Beyond the pointlessness of the debate, there’s been an argument whether the Bundesbank is going in the direction of arguing for Germany leaving the euro, given that the ECB’s measures are pretty much essential to euro survival, and have been extremely conservative so far. It could be. It could also be playing the role of the “useful idiot” by showing that there’s multiple forces pulling in different directions, so as to guarantee that wherever it goes some intransigence will prevent the ECB from going totally wild. This is actually quite positive for the euro’s stability, as it makes it hard to argue it is completely controlled by crazy inflationists, thus killing most opposition before it can even start.

Is Jens Weidmann under an explicit brief of being a useful idiot? I doubt that, but it is convenient for everybody. I would be more inclined to think that whoever ends up head of the Bundesbank is going to face institutional existential angst. The current clunky setup where the national central banks are notionally members of a network but operationally branch offices is doomed to normalise into more centralisation — unless the euro doesn’t survive. Most branch office functions should sooner or later (if you think decades) be subsumed into the central core. The direction of travel is clear. Banking union takes away one of the few remaining relatively independent responsibilities national central banks still have. The Target-2 non-problem, if it at some point it was to surface as a political issue, can quickly be resolved by consolidating the accounts centrally once and for all, and taking the NCBs out of the equation.

So what is the future of the Bundesbank once stripped from its ECB branch office functions? Hard to see apart from being the custodian of (pointless) German gold. Maybe that’s why they’re repatriating some of which was stored elsewhere: to have something to do.

So going forward, the Bundesbank will probably not be notionally abolished, but will functionally disappear in all but name. That might explain slightly queasy management.


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