Bundesbank President Nagel: The new falcon in the central bank

The new Bundesbank President Joachim Nagel was ceremoniously inducted into office in the morning. He takes over his position in difficult times – and starts with high expectations.

Joachim Nagel takes over the management of the Bundesbank in troubled times. The inflation rate in Germany has recently risen to 5.3 percent, in the Euozone it was 4.9 percent – far from the two percent stability target of the central banks. But precisely for this – for a return to more price stability – Nagel now wants to campaign in the Council of the European Central Bank, its highest decision-making body.

He currently sees the danger “that the inflation rate could remain higher than currently expected,” said Nagel at the ceremony in the morning. The current inflation rates are also due to special effects, “but not only,” said Nagel. That already worries many people, especially since the medium-term price outlook is “extraordinarily uncertain”.

Advance praise – and high expectations

With this, Nagel meets the expectations of politicians, economists and bankers. The new Bundesbank President must tackle the newly inflated inflation “with all determination”, says Helmut Schleweis, President of the German Savings Banks and Giro Association. “It is important to work together with the central banks in the Eurosystem to prepare for the exit from the ultra-expansionary monetary policy. In the future, this should also include the exit from negative interest rates.”

Deutsche Bank boss Christian Sewing praised Nagel in his role as President of the Association of German Banks. “This brings an expert with many years of central bank experience and excellent knowledge of the financial markets to the head of the German central bank.” The appointment of Nagels fits Germany’s role as an “anchor of stability in Europe”, as stated by the federal government in the coalition agreement. Otmar Issing, ex-chief economist at the Bundesbank and the ECB, called Nagel a “stroke of luck for the institution”. He stands for a stability-oriented monetary policy.

Nagel should therefore remain true to the line of his predecessor Jens Weidmann and thus the Bundesbank and advocate a tighter monetary policy – with higher interest rates and the end of a policy with the banknote press. So a new “falcon”. The chances are good. “Joachim Nagel is socialized in the Bundesbank and an experienced central banker,” says economist Friedrich Heinemann from the ZEW research institute. He can be trusted to advocate the Bundesbank’s stability policy in the ECB.

Own growth of the Bundesbank

The graduate economist Nagel worked for the Bundesbank for 17 years, six of them on the board, to which he was appointed in 2010 as the successor to Thilo Sarrazin. Then he switched to the state development bank KfW. Most recently he worked at the Bank for International Settlements (BIS), which is also known as the central bank of the central banks. Nagel drew political attention in the early nineties as a consultant for economic and financial policy at the SPD party executive in Bonn.

Nagel belongs to the moderate wing of the Social Democrats and is now considered a guarantee that he will continue the rather cautious course of his predecessor. In 2013 he warned in an interview with the “Börsenzeitung” that an excessively loose monetary policy could trigger bubbles in asset prices. “We have emphasized several times that we are observing price developments on the residential property market very closely,” he said at the time. A supporter of expansionary monetary policy sounds different.

Limited design options

However, the design options of the new Bundesbank President are just as limited as those of his predecessor. Like the other 24 members, Nagel has only one vote in the Council of the European Central Bank (ECB) – even if Germany is Europe’s largest economy. According to the law, Nagel should not sit as a representative of Germany in the Central Bank Council, but as a member from Germany who decides on monetary policy for the entire euro zone.

This is only theory, but Nagel – like his predecessor Weidmann – is likely to be on the defensive as a proponent of a tighter monetary policy; Most of the other monetary watchdogs in the Governing Council from southern Europe and France prefer a rather relaxed course with the lowest possible interest rates. They also like to point out the fact that the recent rise in consumer prices is by no means a consequence of the zero interest rate policy of recent years.

Nevertheless, it could be easier for Nagel than its predecessor. In the meantime, the ECB has recognized that inflation will last longer and be more persistent than initially assumed. This speaks in favor of a foreseeable departure from the zero interest rate policy of recent years. The American Federal Reserve is already in the process of ending its expansionary monetary policy; a Bundesbank president who goes with the global monetary policy mainstream is therefore likely to be less isolated in the ECB than his predecessor. In this respect, Nagel’s calling comes at the right time.