INSIDE THE BUNDESBANK Hans Tietmeyer President of the Deutsche Bundesbank (reproduced with the Bank's permission). Inside the Bundesbank Edited by Stephen F. Frowen Honorary Research Fellow Department of Economics University College London and former Bundesbank Professor of Monetary Economics in the Free University of Berlin and Robert Pringle Editor, Central Banking Foreword by Hans Tietmeyer President, Deutsche Bundesbank in association with Palgrave Macmillan This edition first published in Great Britain 1998 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world A catalogue record for this book is available from the British Library. ISBN 978-1-349-26478-0 ISBN 978-1-349-26476-6 (eBook) DOI 10.1007/978-1-349-26476-6 This edition first published in the United States of America 1998 by ST. MARTIN'S PRESS, INC., Scholarly and Reference Division, 175 Fifth Avenue, New York, N.Y. 10010 ISBN 978-0-312-21253-7 Library of Congress Cataloging-in-Publication Data Inside the Bundesbank I edited by Stephen F. Frowen and Robert Pringle. p. em. Includes bibliographical references and index. ISBN 978-0-312-21253-7 I. Deutsche Bundesbank. 2. Banks and banking, Central-Germany. 3. Monetary policy-Germany. I. Frowen, Stephen F. II. Pringle, Robert, 1939- . HG3054.132 1998 332.1'1'0943--dc21 97-42221 CIP Selection and editorial matter© Central Banking Publications Ltd 1995, 1998 Individual chapters © Jiirgen Becker, Leonhard Gieske, Reiner Konig and Caroline Willeke, Peter Schmid, Berthold Wahlig and Carola Gebhard 1995, 1998 and© Hans Tietmeyer, Otmar Issing, Norbert Kloten 1998 Earlier versions of Chapters 2-6 and 11 appeared in the summer 1995 issue of Central Banking and Chapter 8 in the autumn 1995 issue of Central Banking. Softcover reprint of the hardcover 1st edition 1998 978-0-333-69988-1 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WIP 9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The authors have asserted their rights to be identified as the authors of this work in accordance with the Copyright, Designs and Patents Act 1988. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 9 8 7 6 5 4 3 2 I 07 06 05 04 03 02 01 00 99 98 Contents List of Tables and Figures vii Acknowledgements Vlll Foreword by the President of the Deutsche Bundesbank ix Notes on the Contributors xii List of Abbreviations xvii Introduction by Stephen F Frowen and Robert Pringle xix The Bundesbank: Committed to Stability Hans Tietmeyer 2 Bundesbank Independence, Organisation and Decision­ Making Leonhard Gieske II 3 German Monetary Unification: Domestic and External Issues Reiner Konig and Caroline Willeke 20 4 Monetary Policy: Targets and Instruments Peter Schmid 32 5 Relations between the Bundesbank and the Federal Government Bertold Wahlig 45 6 Banking Supervision: Who is Doing What? Jurgen Becker 56 7 Recollections of the German Treaty Negotiations of I990 Hans Tietmeyer 68 8 German Unification: A Personal View Norbert Kloten 110 v vi Contents 9 Ethics and Morals in Central Banking: Do They Exist, Do They Matter? Otmar Issing 120 10 The Evolution of the Deutsche Mark as an International Currency Carola Gebhard 139 11 Profiles of Bundesbank Presidents 174 Index 181 List of Tables and Figures Tables 3.1 Discount rate of the Bundesbank 26 4.1 Monetary targets and their implementation 36 4.2 Basic scheme for deriving a monetary target 39 8.1a German public sector deficit 116 8.1b The credibility bonus: foreign financing of the deficit 116 10.1 Inflation rates of selected countries based on consumer price indices, 1980-95 141 10.2 Currencies and weights in the SDR basket 141 10.3 Share of world exports 142 10.4 Currency denomination of German exports 143 10.5 Structure of German foreign trade by currencies and by regions in 1989 144 10.6 Currency denomination of German imports 144 10.7 Currency denomination of exports in other countries 145 10.8 Currency denomination of imports in other countries 145 10.9 Foreign Deutsche Mark denominated investment in Germany, 1980-94 153 10.10 Currency distribution of international bond issues, 1985-94 154 10.11 Shares of major currencies in total foreign exchange reserves, 1975-95 158 10.12 Location of Deutsche Mark denominated foreign reserves 160 10.13 Currencies and weights in the ECU basket 161 10.14 The international role of the Deutsche Mark at a glance 166 Figures 10.1 International Deutsche Mark denominated bonds held by non-residents, 1980-94 155 10.2 Foreign exchange reserves held in Deutsche Marks by country group, 1975-94 159 Vll Acknowledgements We wish to thank Central Banking Publications for the permission they have kindly given to reprint in this volume updated versions of the essays by Jurgen Becker, Leonhard Gieske, Reiner Konig and Caroline Willeke, Peter Schmid and Bertold Wahlig as well as the profiles of Bundesbank Presidents. These articles and profiles were originally published in the Summer 1995 Special Issue of Central Banking on 'Understanding the Bundesbank'. Our thanks are also due for permission to reprint an updated version of the paper by Norbert Kloten which appeared in the Autumn 1995 issue of Central Banking. The chapter by Otmar Issing is the text of his Henry Thornton Lecture presented in London at the City University Business School on 23 November 1995. We are grateful to Professor G.E. Wood of the Business School for his generosity in allowing us to include the Issing contribution, first published in G.E. Wood and Forrest Capie (eds) Monetary Economics in the 1990s by Macmillan, in our book. The German version of Chapter 7 by Hans Tietmeyer, 'Recollec­ tions of the German Treaty Negotiations', was originally published in 1994 in Tage, die Deutschland und die Welt veriinderten, edited by Theo Waigel and Manfred Schell. We wish to express out deep appreciation to the members of the German Central Bank Council past and present, and to the Heads of Bundesbank Departments who have contributed to Inside the Bundes­ bank. Above all, we owe a special debt to the Bundesbank President, Professor Hans Tietmeyer, without who support this volume would not have been possible. We wish, finally, to thank Tim Farmiloe, the publishing director of Macmillan, Sunder Katwala, the editor, and Keith Povey, the editor­ ial services consultant, for the endless skill, resource and care which they have lavished upon this book. STEPHEN F. FROWEN ROBERT PRINGLE Vlll Foreword The monetary policy decisions of the Deutsche Bundesbank are atten­ tively registered, analysed and occasionally also criticised world-wide. What monetary policy can and should achieve is assessed by many observers primarily against the backdrop of short-term financial mar­ ket interests. Medium and longer-term aspects of monetary policy, its macroeconomic integration and responsibility, sometimes recede into the background. This book addresses itself especially to Anglo-Saxon readers who are less familiar with the historical, legal and institutional basis of German internal and external monetary policy. In the indivi­ dual contributions both former and active representatives of the Deutsche Bundesbank highlight the goals of the German central bank and its role in the economy as a whole in terms of its duties and functions. Furthermore, the book reports on events in the histor­ ical context of German reunification. The Deutsche Mark is one of the leading international transaction, reserve and investment currencies. In Europe it has, moreover, become the de facto anchor currency for the European Monetary System (EMS). The international reputation of the Deutsche Mark is based on its remarkable stability performance. Since the introduc­ tion of the Deutsche Mark in 1948, the rate of inflation in Germany, at an average of 23I 4 per cent, has been comparatively low by inter­ national standards. As a mirror image of the stability of domestic purchasing power, the Deutsche Mark has appreciated considerably relative to most other currencies. The internal and external stability of the value of the Deutsche Mark is ultimately a reflection and result of a stability culture in Germany which has grown over a period of decades and which has its origins in the painful historical experi­ ence of two hyperinflations with their disastrous social and political consequences. Judging by past experience, monetary stability has no special lobby. It needs to be based on a social consensus which assumes concrete shape in terms of adequate legal and institutional regulations. The German legislature has deliberately and unambiguously committed the Bundesbank to the primary objective of safeguarding the cur­ rency. The fact that it is independent of instructions from other bodies in monetary policy matters takes account of the finding that, without the protective shield of independence, central banks are exposed to a ix X Foreword latent danger of being called upon to perform tasks which they cannot fulfil with the instruments they have. Ensuring the stability of the currency can be lastingly successful only if it is understood and accepted as a common task of all those responsible for economic policy. Fiscal and pay policy makers, in particular, are called upon to play their part in anti-inflation policy. In the long run, too great a burden would be placed on monetary policy makers if they wished to correct misalignments in other policy areas.