Interview: Joachim Wuermeling, Deutsche Bundesbank
• Responsible for markets and information technology at the Bundesbank.
• Wuermeling was born in 1960 in Münster.
• He has a law degree and PhD.
• From 1999 to 2005 Wuermeling was a Member of the European Parliament in Bavaria’s Christian Social Union.
• He has also worked as a civil servant and member of the executive board of the German Insurance Association (Gesamtverband der Deutschen Versicherungswirtschaft).
It is widely understood that they play a crucial role in modern economies but relatively few, even among market professionals, understand exactly how they do it. The workings of central banks remain a mystery to many despite a shift towards more transparency over the years. That is even with the huge amount of attention paid to quantitative easing and interest rate policy.
If anything the working of the central banks of the Eurosystem – those 19 EU member states that use the euro as a currency – seem even more mysterious than most. They no longer perform what are widely regarded as the key functions of central banks: setting interest rates and issuing bank notes. Those functions are now the responsibility of the European Central Bank (ECB).
Few would dispute that the Deutsche Bundesbank, Germany’s central bank, is in practice the pre-eminent institution of its type in Europe. This is largely a reflection of Germany’s economic weight but it also results from the organisation’s reputation as a stalwart force against runaway inflation.
Yet even the mighty Bundesbank does not have a say in setting euro-zone interest rates. Although its president, Jens Weidmann, is a member of the governing council of the ECB, he officially sits there in a personal capacity. He does not represent the Bundesbank or indeed Germany in that role.
Weidmann also only has one vote on the governing council – despite Germany’s position as the region’s largest economy – the same as the other governors of euro-zone central banks. The organising principle is that the ECB governing council should do what is best for the euro-zone as a whole rather than representing national interests.
His fellow Bundesbank executive board member, Joachim Wuermeling, describes one of the German central bank’s key roles as supporting Weidmann’s ability to make an independent decision.
To help Weidmann make his decision there are several Bundesbank committees which discuss related topics and make proposals. The Bundesbank is intensively involved in the preparatory work. But Wuermeling is at pains to emphasise that it is the ECB, rather than the Bundesbank or any other national central bank, which ends up making the call.
Naturally monetary policy decisions have to be implemented once they are made. That clearly does fall under the remit of the national institutions. In the Bundesbank’s case it is the markets department under Wuermeling that is responsible for buying bonds, refinancing the banks and other monetary policy instruments.
In relation to the ECB’s current quantitative easing (QE) programme the target is to buy €60bn a month, of which the Bundesbank is responsible for about €12bn. The German institution therefore looks at how many trading days are available in that month and organises its daily buying programme accordingly.
There is a daily teleconference with other eurosystem central banks where the market situation and liquidity are discussed. On that basis the daily purchases are fixed. In additional to sovereign bonds it can also buy, for example, bonds of federal states, regional governments and government agencies. “There is a certain flexibility and one has to decide every day what to do,” says Wuermeling.
Co-ordination with non-Eurosystem central banks, he says, exists on different levels. He is keen to point out that, for now at least, the Bank of England is a member of the European system of central banks. That is because all EU member states are ECB members even though not all are members of the Eurosystem. All of the central banks of all the EU countries meet in enlarged format meetings of the ECB and have regular contact.
Globally, central bankers also have other forums to get to know each other. These include the Bank for International Settlements based in Basel in Switzerland, which has regular meetings for the governors of its 60 member central banks. That is in addition to numerous working groups. Then there are meetings of central bankers at the G7 events of the largest industrialised democracies at G20 meetings as well as at the Financial Stability Board. There are also conferences in such places as Jackson Hole in Wyoming and Sintra in Portugal. This means that in the event of a crisis the senior central bankers of different countries will have the advantage of already knowing each other. “They know each other well on a personal basis so they can email or phone each other 24/7 if there is a problem,” he says.
Regarding the impending winding up of QE he is keen to emphasise that there is no cause for concern. Even when the Eurosystem central banks stop bond purchases it will not have an immediate effect on its existing considerable balance sheet. “The expansionary impact of the asset purchase programme relies predominantly on the stock of bonds in Eurosystem’s balance sheet, less on its monthly net purchases,” he says.
“Even if the governing council would decide to phase-out net purchases, the stock would remain the same because of governing council decided to re-invest maturing bonds one-to-one,” says Wuermeling. “Hence, monetary policy would remain loose.”
Of course, as a central banker an important part of his role is to reassure the markets. But with the reversal of QE expected before too long those involved in the markets would do well to take a close look at how central banks operate.