“Communitarization of tax policy is not envisaged” Interview for the supplement “Wohlstand für Alle – Vorteil Marktwirtschaft” of the Ludwig-Erhard-Stiftung

Interview with Jens Weidman by Dorothea Siems.

The coronavirus crisis changes the balance between the state and the economy. Faced with the great future challenges we are facing, should the State permanently play a more important role?

It was right for the state to take massive action during the pandemic to support people and the economy. At the same time, the crisis itself has shown how innovative our economic system is. The example of vaccine development shows that the role of the state and the support it provides cannot simply be measured by the size of public spending. The underlying research received government funding and was conducted at state universities. Yet the rapid success we have seen is due to innovative and courageous businessmen who have used this research to develop vaccines. The state is responsible for the general framework and, for example, for the provision of infrastructure, a good education system and the funding of research. But the task of developing and delivering compelling products should always be left to the private sector.

Does the same apply to climate change? At this year’s World Economic Forum, Chancellor Merkel and European Commission President von der Leyen argued that more state intervention is needed in this area.

It is not a contradiction. For effective climate action, we need the right pricing for CO₂ broadcasts so that people adjust their behavior accordingly. Currently, CO prices₂ emissions do not sufficiently reflect their impact on the climate. Here, the state can take action in the form of emissions trading or a carbon tax. The price mechanism is very powerful and efficient. It should therefore play a central role in solving this problem. However, an ambitious and credible path to reduce emissions as well as international cooperation on cross-border effects will also be crucial.

The big tech companies are based in the United States and China. Should Germany and the EU opt for a strategic industrial policy to pave the way for similar market leaders with certain monopoly tendencies?

Monopolies are generally no more innovative than competing firms. You may remember what it was like when there was still a telecommunications monopoly in Germany. Competition has brought huge improvements and expanded the range of services on offer – as well as price reductions. Would we be likely to be successful in starting a new Silicon Valley from scratch in the Stuttgart Valley, or elsewhere for that matter? The crisis has shown that we have leading companies in key areas. To ensure that more of these innovative companies emerge, we need to see improvements, for example, in the conditions for venture capital or research cooperation between universities and companies.

The pandemic leaves a big dent in the government’s budget. Is the sustainability of public finances threatened?

No. We were in a relatively good position when the pandemic first struck, and the associated burdens are likely to be largely temporary. The crisis has shown how important it is to be able to take ad hoc fiscal measures. At the same time, we face major budgetary challenges, especially with regard to demographic changes. That is why we must return to a healthy fiscal trajectory after the pandemic.

So the debt brake is not an obstacle to investment?

Absolutely not. First, the debt brake has proven itself and has not stood in the way of the massive fiscal response to the pandemic. Relative to economic output, public expenditure – excluding interest expenditure – has been rising sharply for several years now and will probably have reached new heights by the end of the crisis. In the end, it is more a question of prioritization than of debt financing. Of course, the debt brake could be adjusted to take the investment into account as well. But then it would be crucial to ensure that its design still reliably underpins sound public finances. I don’t know if this will eventually be successful. In any case, national and European fiscal rules must also help protect the single monetary policy from the pressures caused by unhealthy fiscal policy in order to ensure that monetary policy does not remain expansionary longer than necessary to preserve price stability.

For the first time, the European Union is contracting a large-scale common debt. There are already more and more calls to make the NextGenerationEU stimulus fund permanent. Would that make sense?

Weidmann: Emergencies like the pandemic are exceptional events; they can justify exceptional solidarity loans. Permanent solutions, on the other hand, must fit within the regulatory framework of monetary union. This framework does not envisage a communitarisation of fiscal policy. Member countries insist on their right to determine their own fiscal policy. But it does mean that they must also take responsibility for their own debt. Otherwise, action and responsibility separate, and there are unwanted incentives to take on excessive debt.

And what about the funding of joint EU projects?

Joint tasks involving shared decision-making are already jointly funded. This makes particular sense where there are cross-border effects, as in the case of climate action or border protection. But the crux of the matter is whether they are funded from current revenue, as they have been so far, or whether joint borrowing is absolutely necessary. Joint borrowing does not correspond to the current conception of the EU. If there is a desire to fundamentally change this view, then we need an open political debate on the issue, and that would likely require far-reaching changes to treaties and to the constitution. Ultimately, it must be clear that if the EU borrows funds, even though the public may be less aware of this debt than of the national debt, it will still have to be repaid by EU citizens to the future.

In Europe, debt has grown rapidly. Is fiscal consolidation now completely impossible for many countries because it would stifle growth?

Of course, countries should not exit crisis measures prematurely while the economy is still fragile and in need of support. But then we have to see a lasting drop in debt ratios, especially where they are very high. In the medium and long term, excessive public debt tends to slow growth.

Inflation has recently increased. Could it be a danger?

Contrary to what some claim, inflation is not dead. The current debate underscores the fact that central banks should not focus solely on potential deflationary risks. From a monetary policy point of view, the inflation figures do not concern me at the moment. Although inflation in Germany may temporarily reach around four percent by the end of the year, as it stands, medium-term price pressures here and in the eurozone have returned a bit below. by two percent.

What drives prices up?

In Germany this year, it is mainly due to certain one-off effects: the end of the temporary VAT cut, the climate package, the rise in oil prices, and a statistical effect on package travel. While all of these factors of course reduce the purchasing power of the public, their effect on the inflation rate is only temporary and monetary policy is more of a medium-term perspective. An important question regarding the future course of prices is how the pent-up consumer demand due to the crisis will be triggered – as we know, containment measures and the risk of contagion have eliminated many consumption opportunities. What would be troubling for us central bankers is the threat of sustained and excessive price pressures – but I see no signs of that at this time.

Can the European Central Bank, however, as it has pointed out, keep interest rates so low for the long term?

He has not set such a rigid course. The Eurosystem has a clear mandate: our main objective is price stability. Interest rates are low as this is currently necessary to preserve price stability. And they will have to increase if necessary based on the medium-term inflation outlook.

Is the mandate of the European Central Bank still so clear? Have we not been seeing an increasing politicization of the stance of monetary policy for some time? After all, the bond buying program particularly benefits countries like Italy, with the purchase of a disproportionate number of their government bonds. Isn’t it also intended to prevent the populists from gaining strength?

Yes, the mandate is really that clear. And no, of course, monetary policy should not aim to influence elections! This kind of strategy would destroy the acceptance and credibility of monetary policy. That is why I think it is particularly crucial to maintain a clear separation between monetary and fiscal policy and to restrict government bond purchases as much as possible.

Can and should monetary policy help achieve climate goals?

Central banks need to pay more attention to climate change. In terms of banking supervision, we need to make sure that banks take sufficient account of the financial risks associated with climate change and climate policy. We need a good way to capture the risks associated with financial stability. And central banks should also appropriately record climate-related financial risks associated with bond holdings on their balance sheets. But this should not be confused with central banks having their own climate policy. We must not blur the lines between the responsibilities of different policy areas. It is up to economic decision-makers to promote or sanction certain economic activities when necessary. It is not the role of a central bank to correct the results of the democratic process because we are in favor of more or faster climate action. Politicization would end up threatening our independence, because being independent means having a narrow mandate. And we need this independence to fulfill our primary objective: to preserve price stability.

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