The Sadness of Karl Otto Pöhl’s Legacy “We now have the ECB française.” ith the largest ever bond-buying pro- gram by the European Central Bank looming, Bundesbankers were in an By Klaus C. Engelen apprehensive mood when they gath- ered on January 13 for a commemora- tive ceremony to mark the passing of the Bundesbank’s former President Karl Otto Pöhl. Pöhl, who for decades served as a member of TIE’s editorial advi- Wsory board, passed away December 9, 2014, at the age of eighty-five. For those present who are or were important to the institution, the huge quantitative easing program, pushed by the ECB’s President Mario Draghi on shaky legal and economic grounds, is feared to be the Bundesbank’s most damaging setback since the start of monetary union. In the long battle to block massive bond purchases from debt- laden eurozone member states, the Bundesbank under its President Jens Weidmann is being forced to take part in the largest money print- ing experiment post-war Europe has experienced. No wonder one of Weidmann’s predecessors, Helmut Schlesinger, confessed in a recent interview that quantitative easing reminds him of “war financing.” Jens Weidmann has often drawn attention to the fact that the ECB’s THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY unconventional monetary measures have huge effects in shifting risks 220 I Street, N.E., Suite 200 and burdens towards member countries and their taxpayers, including Washington, D.C. 20002 Germany. For the Bundesbankers, European monetary union means that Phone: 202-861-0791 Fax: 202-861-0790 the fortunes of German savers and taxpayers have been taken hostage www.international-economy.com [email protected] Klaus C. Engelen is a contributing editor for both Handelsblatt and TIE. 34 THE INTERNATIONAL ECONOMY WINTER 2015 Engelen The Bundesbank marked the passing of its former President Karl Otto Pöhl in a commemorative ceremony on January 13, 2015. to lower the debt service costs of southern member states and to bail out their banks. The ECB will become the larg- est creditor of eurozone member countries, thus lessening pressure on governments for fiscal consolidation and eco- nomic reforms. Adding insult to injury, Germany’s politicians—led by Chancellor Angela Merkel and Finance Minister Wolfgang Schäuble—seem to have been looking the other way or else hiding behind the assertion that the (highly politicized) ECB is independent in its “monetary” decisions. In reality, the Merkel coalition government lets the ECB do a large part of the eurozone rescue work while keeping quiet about the fiscal support for fear of getting in trouble with the voters. Former Bank of Italy chief “Super Mario” is succeed- ing in using the Club Med debtor majority to remodel the ECB into what some call “a eurozone wealth-of-nations re- distribution mechanism,” giving not only Bundesbankers a sinking feeling. The Bundesbank under Weidmann is in- creasingly isolated in its struggle to keep the ECB within its monetary mandate. This hurts, but is seen as a challenge to close the ranks with increased resolve to stick to the eco- nomic and legal foundations of European monetary union. Since most remember the years when Pöhl—at the le- vers of political power in Bonn and as vice president and president of the Bundesbank—was dealing with the mon- etary turbulence and challenges of the 1970s and 1980s, How could a central bank some nagging questions were in the air at his memorial cer- emony. How could a central bank that was able to use its dominant position as monetary anchor on the European and that was able to use its dominant position global stages to protect the fortunes of the nation’s econo- my be rendered so powerless now? The answer is obvious: The Deutsche Bundesbank as monetary anchor on the European was once the cornerstone of European monetary stability, but was used as a bargaining chip for politicians negotiat- ing ever-deeper European integration. “Even the ghosts of and global stages to protect the fortunes Germany’s Auschwitz past have been used to intimidate, demean, and sometimes even terrorize those who oppose the dismantling of the Bundesbank and the replacement of the nation’s economy of the deutschmark with ‘political money’,” this Buba- watcher wrote in TIE in 1997. be rendered so powerless now? SON OF A CIVIL SERVANT Karl Otto Pöhl was born in Hanover as the son of a civil ser- vant a few days after the October 1929 stock market crash. WINTER 2015 THE INTERNATIONAL ECONOMY 35 My Two Pöhl Encounters s someone who began re- Treasury of a German journalist with as monetary hard-liner, for causing porting on the world of high a top U.S. Treasury official turned the “Black Monday” stock market Afinance and central bank- out to be quite successful. Mulford crash of 1987, then the largest one- ing at a time when the old Bretton and Pöhl had never met in private. day market crash in history. The Woods System of fixed exchange After sounding out Pöhl’s assistant, Dow lost 23 percent of its value on rates still existed, I can look back at Gerd Häusler, on a walk along the October 19, 1987. the decades where Karl Otto Pöhl Georgetown Canal, the idea was played important roles as political born to persuade Mulford and Pöhl here was another encounter advisor, key negotiator, and central to meet privately for lunch or dinner with Pöhl that I cannot for- banker. I’ll never forget two memo- in the near future. Tget. I was invited to his office rable encounters with Pöhl. That was easier said than done. to talk about how much his public At the 1986 IMF Annual Under the U.S. rules, a high Treasury standing had been damaged by hav- Meeting, the almost two-year conflict official is not supposed to have an ing been overruled and outmaneu- between the German government exclusive meeting with a top for- vered by the Kohl government on and the Reagan Administration over eign central banker without someone the controversial issue of the timing macroeconomic and exchange rate from the Federal Reserve sitting in. and the exchange terms of German policy following the Plaza Accord in In spite of this, that “peace monetary union. What advice could September 1985 came to a head. meeting” became reality when Pöhl I give? The American delegation, head- visited the new representative office Those television pictures from ed by Treasury Secretary James Berlin showing the president Baker, his deputy Richard of the Bundesbank telling the Darman, and Undersecretary “That private meeting in New York with nation that German monetary for International Affairs Karl Otto was extremely helpful. union was far off in the future David Mulford, was upset that but—as it turned out the next Germany continued to resist From that meeting on we both day—had already been decid- American pleas to stimulate do- started to work on what became ed as a political matter by the mestic demand. Badmouthing the Louvre Agreement.” Bonn coalition government, from the German delegation with exchange rate terms that reaching the American side the Bundesbank had rejected through the press caused more irri- of the Bundesbank in New York. At on economic grounds, damaged tation. The German delegation was the time, Häusler could confirm that Pöhl’s standing irreparably at a his- headed by Finance Minister Gerhard everything went well. toric crossroad of German history. Stoltenberg, his Permanent Secretary In a recent telephone call from He was not only bested by Hans Tietmeyer, and Bundesbank the Davos World Economic Forum, Chancellor Helmut Kohl, Kohl’s President Pöhl. Pöhl, for instance, Mulford, now vice president of Minister of Finance Theo Waigel, had badmouthed Mulford as “just Credit Suisse, recalled: “Yes, that and by their Permanent Secretary a messenger boy who thinks he is private meeting in New York with Hans Tietmeyer. He also was caught important.” Karl Otto was extremely helpful. off guard for everyone to see. Some From U.S. Treasury higher-ups From that meeting on we both started in the Bundesbank had known about too came insults. Pöhl was character- to work on what became the Louvre the momentous government deci- ized as “someone talking from both Accord in February 1987.” Mulford sion, but didn’t inform their president sides of his mouth.” Tietmeyer was recently published a memoir, Packing in time. ridiculed as “not knowing when to for India: A Life of Action in Global But was this reason enough to stop his endless economic lectures.” Finance and Diplomacy (Potomac step down? That was his personal Even Stoltenberg caused irritation Books, 2014). decision. He could have played by because “all the time taking notes in Badmouthing from the top of the the rules and served out his term. Or his class gets on one’s nerves.” U.S. Treasury, it should be remem- he could have followed the principle At the Credit Suisse reception bered, entered into the history books that one could not accept such a hu- at Dumbarton Oaks in Georgetown, a year later when Baker blamed miliation by one’s own government Mulford suggested getting together Helmut Schlesinger, the Bundesbank and top colleagues, and step down after the IMF meetings on Friday to Vice President and chief economist, early. The latter happened. talk things over. That meeting in the who had a near-legendary reputation —K. Engelen 36 THE INTERNATIONAL ECONOMY WINTER 2015 Engelen introduce the deutsche mark to East Germany led to Pöhl not serving out his full term. The Bundesbank was used And Weidmann reminded those present that “Karl Otto Pöhl was also initially skeptical about another project: that of European monetary union, for which he was among as a bargaining chip.