As cost overruns on a refurbishment of its Great Depression-era headquarters threaten to cost the Federal Reserve chairman his job, central bankers in Germany are facing a real estate nightmare of their own.
Eight years ago, the Deutsche Bundesbank unveiled an ambitious overhaul of its iconic campus in Frankfurt. But runaway inflation in construction costs and the remote working revolution — both heavily influenced by the pandemic — have made a mockery of its ambitions, leaving it footing the bill for billions of euros, and reputational costs that could prove even more serious in the long run.
A report from Germany’s Federal Audit Office, obtained by Platow Brief, reveals that the Bundesbank’s troubles eclipse even those of the Fed: The original €3.59 billion estimate (never published by the central bank) had ballooned to €4.6 billion by 2022. That’s double the cost of the Fed’s two-building project, which has landed Jerome Powell in hot water with U.S. President and real estate mogul Donald Trump: Its cost has risen from $1.9 billion to $2.5 billion. The Federal Audit Office “broadly” confirmed Platow’s reporting to POLITICO.
In response, President Joachim Nagel has massively downsized the original plans drawn up by his predecessor, Jens Weidmann. Spinning the reworking as a shift toward modernization and a response to new work realities, Nagel scrapped four new office buildings last year, after updating assessments of the bank’s actual need for office space.
Traditionally, the Bundesbank has given everyone above a certain level their own office, resisting a decades-long trend toward more open-plan designs. But with the advance of hot-desking, and with staff having become accustomed to the benefits of remote working during the pandemic, the bank now thinks it can manage with only 2,500 individual workplaces, rather than the 5,000 it originally planned.
In a statement following the release of Platow’s article, the Bundesbank said the audit office’s latest report “confirmed that it was the right decision to make a significant turnaround in the project. ”
But according to Platow’s account, the Bundesbank dragged its feet on necessary changes for years, and only overhauled the project after a scathing critique from the auditors. The watchdog also blasted the Bundesbank for splashing out on oversized sports and restaurant facilities and guest apartments. An underground tunnel — much like the Fed’s controversial passageway between its main building and the adjacent 1951 Constitution Avenue building — was also deemed wasteful.
Things got even more complicated in 2022, when the Bundesbank’s main building — a 1970s brutalist hulk of concrete and glass — received special conservation status. That made the project technically much harder and consequently more expensive, another problem in common with the Fed.
Building pressures
It’s not the first time a public building project has blown past its planned budget, and the eurosystem has had, at best, mixed experiences with project management. The European Central Bank — across town from the Bundesbank — ended up spending €1.4 billion for its glass towers by 2014, rather than the initially earmarked €850 million.
Meanwhile, the Dutch central bank did manage to stick to its €320 million refurbishment budget, in stark contrast to developments in The Hague, where a similar project for the Binnenhof Parliament buildings ended up coming in at more than four times the initial estimate. And the Central Bank of Ireland’s new HQ also cost a relatively modest €323 million — although it got its hands on the property for a knockdown price because its original owner, Anglo-Irish Bank, collapsed in 2009, taking the entire Irish economy with it.
Building projects and monetary policy are of course two entirely unrelated disciplines, but poor management of the former inevitably invites accusations of incompetence in the latter. Powell and the Fed, in particular, have found out how vulnerable they are to politicians who envy their power over economic policy. President Donald Trump has latched onto the Fed’s runaway renovation tab as a new pretext to oust Powell, having been told by the Supreme Court that he cannot fire him over his refusal to cut interest rates.
In a single social media post this week, Trump showed how easy it is to conflate the two, urging Powell to cut interest rates “NOW” and threatening him with a “major lawsuit” because of alleged poor management of the building project.
The stakes are almost unimaginably high. For decades, both academic research and real-world experience have shown that central bank independence is unrivalled in keeping inflation down and building the foundation for sustained growth. However, that doctrine has come under fire after the worst global bout of inflation in 40 years, which has only subsided gradually. To make things worse, the Bundesbank project has gone sour just as it has booked a series of massive losses thanks to years of zero interest rates and bond purchases by the ECB.
When the Bundesbank moved into temporary offices at the start of this decade, journalists joked it wouldn’t be the ECB’s bond-buying spree that cost it its independence — as Weidmann had long warned — but the renovation project.
Germany’s current political realities make a Powell-style public assault on Nagel unthinkable — for now. But the country’s trust in its institutions is fraying, and Nagel himself has warned that undermining the Fed could reverberate far beyond the U.S. The venerable Otmar Issing, formerly chief economist of both the Bundesbank and the ECB, warned last month that independence “is a historical exception and could be reversed by a change in the political climate.”
Recognizing its explosive potential, Nagel assumed direct responsibility for the project relatively quickly after taking office in 2022 and is now conducting a feasibility study of the entire project in line with the Federal Audit Office’s recommendation. But it’s far too early to tell whether that will ultimately protect him and his institution: The building process is scheduled to run another 10 years.
The post Bundesbank faces enormous cost overruns on refurbishment of its iconic HQ appeared first on Politico.
