After the D-Mark: The reform of public debt management in Germany

Between 2000 and 2002, the red-green government fundamentally altered the management of federal public debt by outsourcing this task to a new agency, the Federal Finance Agency (Bundesrepublik Deutschland Finanzagentur GmbH), which was established as a publicly owned limited liability company (GmbH). This reform was not only strongly opposed by the traditional debt managers, the Bundesbank and the Federal Debt Administration (Bundeschuldenverwaltung), but also met fierce resistance by the Public Accounting Office (Bundesrechnungshof). The Federal Finance Agency is based in Germany’s financial center, Frankfurt am Main, and has become the central service provider for the Federal Government’s borrowing and debt management. Very quickly the Finanzagentur has also started using interest-rate swaps in order to hedge interest rate risks and shorten the maturity of government bonds. Analyzing the politics of this institutional innovation, the paper argues that the Ministry of Finance (MoF) played a leadership role in the reform process. It shows that the arrival of the Euro brought with it a power struggle between the Ministry of Finance and the Bundesbank. The end of the D-Mark annulled the Bundebank’s traditional veto position and enabled the MoF to initiate a fundamental reform of Germany’s sovereign debt management.  This evidence fits better to the concept of institutional innovation as result of entrepreneurship than to institutional approaches which conceptualize institutional innovation as a consequence of profit maximization or layering and displacement.