"Let’s not lose sight of the risks that our monetary policy poses to financial stability"
Interview with the French daily newspaper "Les Échos" in its unabridged version, published on lesechos.fr
Interview with Jens Weidmann conducted by Isabelle Couet, Guillaume Maujean und Virginie Robert.
Translation: Deutsche Bundesbank
What do you think of Emmanuel Macron’s European initiatives? How the euro area has been governed is a point of conflict with Germany ...
I don’t think there is any conflict on this point. President Macron raises some very important questions and he has Germany’s backing in his aim to create a more stable euro area. But we should reach agreement on key points before discussing the finer details. What matters is that Emmanuel Macron is sparking debate.
What are these key points?
Above all, things need to be done in the right order – a discussion about risk-sharing or a common budget should not be an objective in and of itself. First, it is necessary to talk about which roles or responsibilities are best served at the European level rather than the national level. There are some areas which do affect us all, such as environmental conservation or border protection, which may require some competences to be transferred to the European level. Let’s define these roles and explain to people why we need to deal with them jointly and the advantages they bring, without forgetting the principle of subsidiarity either.
Furthermore, I think the strength of the European economy lies in the strength of its members, and each member needs to put its own house in order. In France, under Emmanuel Macron, we have a partner who is also taking responsibility for its own affairs. We are impressed by what we are seeing there, whether it is the speed at which reforms are being carried out or the range of these reforms. Europe will also benefit from them, even if their effects will only be felt in the medium term.
What role will be given to the European Stability Mechanism (ESM)? Will it still be useful once the crisis is over?
Not only should we keep it, we should also strengthen it. The IMF’s role in Europe is diminishing. We have now established an institution whose existence alone reduces the risk of crises, at least as long as it does not prompt anything to the contrary. I think the ESM should have more influence in budget supervision, which would help bring an end to the conflict of interest inherent in the European Commission. It is also an institution that creates policy and should be an impartial adjudicator in matters concerning budgetary regulation. I suggest the ESM should be responsible for examining the situation of member states’ public finances, preferably on the basis of simpler and clearer regulations. I also believe it should be the institution responsible for coordinating debt restructuring measures for member states, if necessary.
Doesn’t institutionalising government bankruptcy risk scaring the markets?
The key issue is rather knowing whether it is possible within the monetary union to exclude with certainty the eventuality of a state becoming insolvent. I don’t think this can be excluded, as member states are sovereign in matters of financial policy. Consequently, member states are responsible for their own debt. We should therefore take measures, as far as possible, to ensure that such an event does not destabilise the monetary union. These measures would create reliable opportunities for investors by respecting the structure of a market economy. I therefore propose including in the ESM’s lending conditions that the debt’s maturity is extended automatically when a country requests a financial assistance programme. A three-year extension allows time to determine whether a country is solvent and stops the taxpayer having to foot the bill for private creditors. This also increases considerably the capacity of the actual ESM assistance, since significantly less funds are required.
Some ideas are being floated, such as GDP-indexed bonds or the securitisation of government debt ...
The first instrument is interesting because if there is an economic slowdown, the government will bear less financial risk, which could strengthen budgetary and financial stability. The Banque de France has discussed this idea and it merits consideration. However, this type of instrument is more complex and riskier than fixed-rate bonds, and participants on the financial markets need to be able to bear these risks. Furthermore, this proposal raises several other questions, as does the securitisation idea, which aims to create safe assets. In any case, the prerequisite for safe government debt is a sustainable budget. Such a step must not lead to the mutualisation of debt by the back door and should be taken by the market itself.
The European Central Bank decided on 26 October to scale back its bond-buying, but did not say when it would terminate the programme. Is the Council split on this issue?
There may have been disagreement on the question of when the programme should end, but the thing to stress is that there was general consensus regarding the analysis of the economic situation, which is seen as fairly positive. We remain convinced that we can bring inflation back to the medium-term objective. We also agree on the continued need for an expansionary monetary policy. And I would like to underscore that the stock of debt purchased by the ECB will not decline even if the flows of purchases fall to zero, as we reinvest the proceeds from the bonds as they mature. That will maintain an extraordinary monetary stimulus.
Do you think that exiting this exceptional policy will take much time?
From a technical point of view, I see no major obstacle to a return to normal monetary policy. However, since the programme was launched, I have warned of the risk that, at some point, we might have to face the fact that the financial markets and the public sector have become accustomed to historically low interest rates. In any case, we must not lose sight of the risks inherent in the current phase of exceptionally accommodative monetary policy, for instance to financial stability.
Do you expect the US Federal Reserve to change its strategy once its new chair has been nominated?
I do not expect a change of strategy at the Fed. However, it is clear that the Fed is in a different cycle to ours. It is at a more advanced stage and is normalising its policy ahead of us, which obviously has an impact on the capital as well as the currency markets. If that has implications for price developments in the euro area, we will react.
Do you think that the ECB’s mandate should be extended?
There are plenty of ideas floating around about what could be added to the objective of price stability, for instance financial stability, a fair distribution of income and wealth, reducing carbon emissions … That would mean tasking the central bank with very difficult value judgements, which fall within parliaments’ remit. That would constitute a conflict with our democratic order and would threaten central banks’ independence. There are good reasons why they operate under a tight mandate. In addition, an expanded mandate would make it much more difficult to evaluate whether we have reached our targets. Price stability is a simple indicator. Let’s stick with just a single objective.
Could the crisis in Catalonia destabilise the euro area again?
No one can predict exactly what will happen, but I do not believe that the situation will escalate so much that it destabilises the monetary union. That said, there is a risk that this conflict will hurt Spain’s economic outlook. I nonetheless hope that those in charge will reach a political solution which manages to reconcile the people and preserve the economic momentum in the region and the country as a whole.
Mario Draghi’s term in office ends in two years. Are you campaigning to be his successor?
No, I am not campaigning; I am a central banker, not a politician. I am very happy with my role as president of the Bundesbank. It is much too early to be discussing Mario Draghi’s successor.
But should the next president of the ECB be a German?
Let’s not go into these fruitless discussions. The debate about the nationality of the ECB president is pointless. We must not exclude any nationality. To do so would be the best way of undermining acceptance of the monetary union in other European countries.
What do you think of Macron’s reforms of the French labour market?
Generally speaking, I do not go into details on national reforms. Nonetheless, I believe that the approach he has chosen looks promising and will be very helpful in reducing structural unemployment. The approach is one of flexi-security, which renders the labour market more flexible, while at the same time providing individuals with better protection. It’s not dissimilar to what we have been doing in Germany for some time now. This has also helped us to weather the crisis better than other countries and to better absorb the shock. In addition, experience has shown that the idea of reducing non-wage labour costs and of funding them more broadly has positive effects on economic performance and employment.
© Les Echos. All rights reserved.