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Global Economy

What is left of the Bundesbank myth

"Not all Germans believe in God, but all believe in the Bundesbank." In 1992, Jacques Delors, the former President of the European Commission, used these words to describe the importance and reputation of the German central bank. The Frenchman, the driving force behind the European Monetary Union, knew only too well what a turning point the introduction of the euro and the associated curtailment of the powers of this German institution would bring. The Bundesbank, which emerged from the "Bank deutscher Länder" in 1957, was once the most important national bank in Europe. She was considered by many to be the most important guardian of money and the guarantor of the stability of the D-Mark.

Still a cornerstone with a high reputation

Especially in times of exuberant inflation, many Germans want the good old days back. Admittedly, the Bundesbank did not always deliver inflation to the desired extent of around two percent. But she managed, sometimes with a heavy hand, to get high price increases in the wake of the oil crisis or German unity back under control. This, together with its reputation of being an important pillar of the German economic miracle of the young Federal Republic, gave rise to the myth of the Bundesbank and explains the high reputation of this institution among Germans.

The Deutsche Bundesbank is now celebrating its 65th birthday. But what is left of it and its meaning? With the introduction of the euro in 1999, most of its powers were transferred to the European Central Bank. The question is asked again and again: Do we still need this national central bank at all?

European Central Bank as a crisis fire brigade

A Bundesbanker himself gave the answer to this several years ago: "The Bundesbank is no longer what it used to be. The myth only exists in rudimentary form," said ex-President Karl-Otto Pöhl on the occasion of the central bank's 50th birthday. But it is not superfluous.

In fact, the Bundesbank has lost much of its importance. This development has intensified because the power of the European Central Bank has increased in recent years through its function as a crisis fire brigade. For example, the ECB went to the fringes of its mandate with the controversial purchase of government bonds and took on some political tasks.

After all, the Bundesbank is involved in the monetary policy of the ECB and can exert its influence. In the European Monetary System, it has only one vote among the 19 member states in the ECB Council, which, together with the six members of the Executive Board, make monetary policy decisions. But as the representative of the largest economy in the euro area, the Bundesbank is a heavyweight and receives special attention. In recent years, she has often taken on the role of an uncomfortable admonisher against excessively loose monetary policy, especially under her ex-president Jens Weidmann. However, this was not of much use because Weidmann often did not find enough allies and was therefore often unable to assert himself. Many observers also see this as the reason for his early resignation. But at least the Bundesbank can try to assert its position.

Supply of cash as the core task

In essence, the tasks of the Bundesbank concentrate on the operational business and the functioning of the monetary union in Germany: The central bank is responsible for supplying the economy with cash via the banks in Germany. To this end, it commissions the production of coins and, in some cases, the printing of banknotes. She ensures the distribution and checks the money, withdrawing any damaged notes from circulation. This also includes securing counterfeit money. Since the Bundesbank also guarantees the unlimited exchange of the D-Mark into euros, it continues to exchange cash holdings. Every week people still come into their branches who have found old D-Mark stocks in basements, in attics or when renovating. According to the currency watchdogs, at the end of last year more than twelve billion Deutschmarks were still in circulation that had not yet been exchanged.

For the banks in this country, too, the Bundesbank and not the ECB is the central point of contact in day-to-day business; because there they indicate how much cash they need, there they refinance themselves. Surpluses that are "parked" in the Eurosystem overnight are not paid into accounts at the ECB, but at the Bundesbank. The Bundesbank is also the commercial bank of the federal government, many federal states, municipalities and other public institutions. It maintains accounts for them and handles payment transactions. It also keeps Germany's currency reserves, in particular the high gold holdings. In the past, the Bundesbank has always resisted when there was a political suggestion to sell them in order to plug holes in the budget.

After all, the Bundesbank, together with the Federal Financial Supervisory Authority (BaFin), is partly responsible for the supervision of banks and savings banks – but only for institutions with total assets of less than 30 billion euros. For larger and systemically important institutions, the European Central Bank has taken over supervision itself since November 2014.

Headquarters conversion more expensive than new ECB building?

The bottom line is that the Bundesbank has a whole range of tasks to do to ensure that monetary union functions smoothly. It is, so to speak, the executive body of ECB policy at the national level. To do this, it still needs around 10,000 employees and maintains nine head offices and 30 branches.

Although that is significantly fewer than the 16,000 employees it once had, it does not prevent the currency watchdogs from confidently building their aging headquarters in Frankfurt instead of making a mess. It is not yet clear how expensive the project, which should be completed in 2027, will be. However, observers assume that it will cost more than the 1.3 billion euros for the new building of the European Central Bank.

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