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Leipzig | 13.11.2017

Weidmann: Don't continue current monetary policy indefinitely

Bundesbank President Jens Weidmann says it would be wrong for the Eurosystem to maintain its current accommodative monetary policy stance indefinitely. He conceded that it was right in principle to loosen policy during the crisis in order to stimulate the subdued price pressure, but noted that views can certainly differ over how far the accelerator needs to be applied, which instruments need to be deployed and which risks and side effects those instruments entail, Mr Weidmann explained at an event organised by the Leipziger Volkszeitung (LVZ) newspaper. "We can't gear our stance to the policy implications for each individual and the different societal roles, but have one objective: price stability," he remarked.

Clear end-date for government bond purchases would have been more appropriate

Policy rates in the euro area have been hovering around 0% since the crisis erupted, and the ECB Governing Council decided only last month, in October, to extend the government bond purchases until September 2018, if not longer, and to reduce the monthly pace of purchases from €60 billion to €30 billion starting in January 2018.

LVZ editor-in-chief Jan Emendörfer, who interviewed the Bundesbank president at this event for readers of the newspaper, picked up on this topic to pose a question that has attracted much debate of late: when will the ECB put an end to the zero interest rate policy? Commenting on the asset purchase programme, Mr Weidmann said: "Of course it's fair to wonder whether it might not have been more appropriate to set a clear end-date for the government bond purchases." He takes a critical view of that instrument, he added, because it blurs the boundary between monetary policy and fiscal policy, which makes it increasingly difficult to put an end to the spell of expansionary policy.

Narrow mandate for central banks

The interview focused not just on current monetary policy in Europe but also on the difficult economic situation facing a number of euro-area countries. Asked to share his views on the situation in Greece, Mr Weidmann explained why it is important for monetary policy not to be geared to the national needs of individual member states.

One major lesson learnt from the 1970s and 1980s, he pointed out, is that central bank independence is more conducive to keeping prices stable. Given that this independent status is an alien concept in a democracy, central banks need to be bound by a very narrow mandate to avoid undermining democratic principles. "If the impression were to arise that we are setting economic policy and intervening in the affairs of individual countries, we would be calling this independence into question," the Bundesbank President remarked.

One fundamental takeaway from the crisis, he added, is that it's up to each individual country to get to grips with their own problems. The community of states can help out by cushioning adjustment processes to buy some time, he told his audience, "but buying time on its own won't solve the problems – it's up to each individual country to do that."

A strong and stable currency

Asked whether it would be possible, in theory, to return to the Deutsche Mark, as demanded by the Alternative for Germany party (AfD), to name but one, Mr Weidmann issued a firm rejection: "People want the euro to function and they want us to offer them a stable currency." That, he added, is why he refuses to speculate on what would happen if the euro area collapsed. "My job is to preserve the euro as a stable currency. That's why I have a seat on the ECB Governing Council, and that's what the Bundesbank is drawing on 60 years of heritage to achieve."

Turning to the debate surrounding the abolition of cash, Mr Weidmann stressed that the general public should be able to pay in cash for as long as they want to. The Bundesbank, he said, offers people a variety of payment instruments, one of which is safe and secure currency that is fit for circulation. He can well understand why many people in Germany tend to pay in cash, given that it is safe, easy to use and – where small amounts are concerned – cheaper than other means of payment.

Weidmann fields questions from the audience

One of the topics raised in the Q&A session following the interview concerned alternative forms of payment such as Bitcoin. Mr Weidmann said he was sceptical about these cryptocurrencies, remarking that a currency that constantly fluctuated in value is not suited for payments. Good for speculators though it may be, he said, it is not a suitable medium for transactions. The underlying technology used for Bitcoin does, however, have its merits, Mr Weidmann noted, saying that the Bundesbank, and others, are currently running trials.

Responding to another LVZ reader who voiced concerns over the high levels of debt in a number of euro-area countries, Mr Weidmann said he understands these misgivings. For years now, he elaborated, he has been pointing out that the debt levels of euro-area countries will need to be just as sustainable when interest rates pick up again and monetary policy returns to normal. "That's why it's so important for us, in our capacity as monetary policymakers, to have a sound fiscal policy in the euro area." It must also be possible – should the need arise – to restructure sovereign debt without causing the financial system to collapse, he added.

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