The reserve currency burden

There is an article in the FT about German economic policy and the contrast between German views and those of the US. The German view is presented by BBK President Weber.

But Ms Merkel’s views are pretty mainstream in Germany. Axel Weber, Bundesbank president and a respected economics professor, said in a recent speech that Germany acted as an “anchor of trust” within Europe; this was the wrong time “to lose sight of the sustainability of public finances”. Germany had taken great steps to boost demand – their effects merely had yet to be felt.

It should be remembered that Germany is traditionally the custodian of the European reserve currency. The pressure on Germany to take more action to stimulate the economy is that often put on the reserve nation. The US has been a lot more accommodating to these pressures. We can look back at a series of monetary policy maneuvers from the Asian crisis in 1997 through LTCM, the millennium bug, 9-11 and into the current financial crisis. The opposition of the BBK to a greater reserve role for the Deutschmark in the 1970s and 1980s is based at least partly on the belief that it would bring increased and wider pressures to take monetary action to stimulate the economy that the central bank did not believe would be appropriate.

We only have to look back at the experience of the ERM when the pressure on the BBK ran from Norman Lamont in Bath through to the French President Francois Mitterrand.