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Interview 21.03.2016

"Helicopter money would tear gaping holes in central bank balance sheets"

Interview with Jens Weidmann published in the newspapers of the Funke Mediengruppe on 21 March 2016: "People worry if monetary policy is too loose"

Interview conducted by Kerstin Münstermann and Jörg Quoos.
Translation: Deutsche Bundesbank

Are the ECB's measures the right move to stimulate Europe's economy?

The idea behind these measures is to encourage euro-area inflation to return more quickly to the avowed rate of just below, but close to, 2%. Specifically, this move is designed to shore up consumption and business investment, and thus to strengthen economic activity as well. Wages and prices will then also see renewed stronger growth. But I've stressed time and again that the longer the ultra-accommodative monetary policy is left in place, the more ineffective it becomes. And it's also worth noting that the more you put the pedal to the metal, the more serious the risks and side-effects you face.

How do you mean?

It is obvious that financial stability, say, is more at risk – bubbles can emerge in financial markets which, if they burst, can make life more difficult for central banks. Life insurers are also being pushed into choppier waters. Plus there's a greater risk of the incentives for sound budgeting being undermined and of the central bank being misused for political purposes. Nor should we allow the non-standard policy measures to breed public uncertainty, since this could run counter to monetary policy objectives.

So what you're saying is that ECB President Mario Draghi's ideas go too far?

Euro-area inflation rates are running at a very low level, and judging by the ECB's most recent forecast, they're going to stay that way for even longer than previously thought. That naturally raises the risk of low inflation becoming entrenched, which prompted the ECB Governing Council to see the need for a monetary policy response. However, the drop in energy prices is a major factor in the low inflation rates, and viewed in isolation, that alone is stimulating growth. We still expect activity and prices to pick up. Deflation is not a prospect. The adopted package of measures is very extensive and didn't win me over, all things told.

Germany didn't have a vote in the last meeting. Does that principle make sense?

That could have been designed differently, of course. That system has now sparked an unnecessary debate over the legitimacy of decisions, when in fact all the Governing Council members continue to participate in deliberations as they have always done, and I don't see how a decision that was not based on the rotating voting system would have turned out any differently.

Will savers need to get used to the idea of negative interest rates?

Major customers are increasingly being asked to pay negative interest rates, and some banks have raised their fees. But I don't expect normal savers to be charged interest on their deposits. The fierce competition between banks and the possibility of savers evading these charges by hoarding cash should see to that. But if banks are stuck with the bulk of negative rates, their profitability – which even today isn't exactly rosy for some – is bound to suffer.

The debate also touched upon "helicopter money" – the idea of giving away money to every member of the general public. Is that the cure?

Helicopter money isn't like manna from heaven – it would tear gaping holes in central bank balance sheets. Ultimately, it would be down to the euro-area countries, and thus the taxpayer, to shoulder the costs because central banks would be unprofitable for quite some time. The question of whether and how money is given away to the general public is a highly political one that would need to be addressed by governments and parliaments. Central banks don't have a mandate to do so, not least because it would mean redistributing assets on a huge scale. It would be nothing short of unreservedly commingling monetary and fiscal policy, a step which would be incompatible with the notion of central bank independence. Instead of raising the prospect of ever more daredevil feats, it would actually be wiser to pause for thought. Monetary policy isn't a panacea – it can't replace urgently needed reforms in individual countries, nor can it solve Europe's growth problems. That would simply be too much of a tall order, and it would most certainly end in tears.

A common European deposit insurance scheme is also on the table. Is it wise that Germany should share liability for other countries' mistakes?

This is yet another area in which stepping up collective liability merely masks, but does not solve, the economic problems facing European monetary union. That's why I think a common European deposit insurance scheme isn't the right step. The first move ought to be one which better contains the risks in bank balance sheets, which is something the Single Supervisory Mechanism alone cannot guarantee. Above all, banks should no longer be allowed to become saturated with bonds issued by their home countries. This lethal embrace between banks and sovereigns is what fanned the flames of the crisis. Yet there is an unwillingness to introduce such constraints, especially among many of those championing the idea of a single deposit protection arrangement.

Europe is also disunited politically at the moment. Does that worry you?

It does indeed worry me that public confidence in the EU institutions is waning. There were times when it appeared as though the European countries were no longer capable of finding common solutions to urgent problems and that they simply ignored agreements. And I'm not just talking about the refugee crisis here. Another case is the commitment by countries to ensure sound public finances, which for many has taken something of a back seat in times like these, when money comes cheap. But taking these frustrations out on Europe would be the wrong response because many of the problems we face in today's globalised community can only be resolved if we join forces and work as a team.

Germany is faring very well. Are we doing enough to make sure things stay that way?

If it's economic policy reform you're talking about, it would be wrong for us to only point our finger at others. An ageing and declining population will be the stiffest long-term challenge facing Germany. The right response would be to boost the participation of women and older workers in the labour market and to improve educational opportunities. It's also important to bring public infrastructure up to scratch where it makes sense to do so, for instance by extending the broadband network. But that should not be to the detriment of sound public finances. By and large, Germany is on a low growth path that looks set to decline further. This is where smart economic policymaking needs to come into play.

Are the refugees part of the solution?

I don't think we should conflate those two topics. The decision to take in refugees is primarily a humanitarian one, not an economic one made with labour market requirements in mind. However, those refugees who will be staying in Germany need to be given the chance to earn a living. That's what makes the acquisition of language skills and vocational training such an important topic, and it's also the key to integrating them into German society.

Finance Minister Wolfgang Schäuble is sticking to his target of a balanced budget in spite of the refugee crisis. Is he right to do so?

Yes, I think that's the right thing to do. Germany's general government debt is running at more than €2 trillion, and population ageing looks set to take an ever greater toll on the country's public finances going forward. Bearing this in mind, sound housekeeping in a manner that leaves a little latitude for unforeseen events is the right way forward. Incidentally, balancing the budget doesn't mean that the state is unable to invest enough but that its investment has to be suitably funded.

Is the possible abolition of the €500 banknote the right way to combat money laundering?

I don't really see much evidence of a connection between noticeably reducing criminal activity and doing away with the €500 banknote. Illegal transactions involving cash, such as drug dealing, are also to be found in the United States, where the US$100 note is the highest denomination. Remember, too, that the €500 banknote accounts for one-third of the cash in circulation in terms of value. Scrapping the €500 banknote would be a tall order, if only for logistical reasons, and it's not something that should be done hastily.

What's your take on the talk of introducing a €5,000 cap on cash transactions?

That's ultimately a political decision, but it would turn the sole unrestricted legal tender in Germany – euro banknotes – into restricted legal tender. Given that interest rates are negative, the talk of capping cash transactions and scrapping the €500 banknote aren't exactly bolstering public confidence in the single currency. That's why I see eye to eye with Finance Minister Wolfgang Schäuble at least on the point that under no circumstances should it appear as though the debate over tackling money laundering is, in fact, the first clandestine step towards scrapping cash.

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