"Central banks need resolve"

The Bundesbank's president Jens Weidmann has spoken out in favour of considering an end to the currently ultra-accommodative monetary policy. This was conditional on economic activity and price developments remaining sound, as expected, he said. "People must be able to rely on the Governing Council of the ECB to exit its expansionary monetary policy rapidly if that is necessary to maintain price stability," Weidmann explained in an interview with German Sunday newspaper Welt am Sonntag.

There was consensus among euro-area central bankers that price pressures in the area would increase over time. "In addition, the Council now agrees that the spectre of deflation has disappeared," Weidmann went on. These were key prerequisites on the route to a normalisation of monetary policy. However, he explained that the signs of a sustained turnaround in terms of inflation were muted, so far. There was agreement that an expansionary monetary policy is justified. "There are, however, different opinions as to how strongly we need to step on the monetary policy pedal and what instruments we should use", the Bundesbank chief noted. In the past, the Bundesbank president has repeatedly criticised the Eurosystem's government bond purchases.

Danger of blurring of boundary between monetary and fiscal policy

Weidmann warned that, in the meantime, central banks must not allow themselves to be taken hostage by governments or the markets and to be overburdened with numerous secondary objectives. Already, an increasing number of demands were being made of central banks and the boundary between monetary and fiscal policy risks becoming blurred. "This can result in political pressure being exerted on the ECB's Governing Council to continue with its accommodative monetary policy for longer than necessary," he said.

It was not unusual for a central bank to be confronted with requests. What counted, was how it responded. Monetary policymakers in the euro area must, he admonished, make it clear that they are guided solely by monetary policy considerations and that finance ministers would have to cope with rising financing costs for public budgets when ultra-easy monetary policy ended. "Central banks need resolve. That has always been the case and will not change," Weidmann stated.

Scepticism towards budget to manage the economy

In the interview, Weidmann also commented on reform proposals such as a European Finance Minister or a common euro budget. The current framework for monetary union provided for extensive national autonomy, independent borrowing and budgetary rules, he explained. "If a finance minister or fiscal authority reinforces this framework, then why not?"

By contrast, Weidmann took a sceptical view of proposals for a common euro budget to manage the economy or for economic redistribution. "I certainly wouldn't welcome a new budget with additional borrowing opportunities – this time at European level," he explained.

Strong France in Germany's interest

On the subject of the new French President Emmanuel Macron, Weidmann said that he was an important friend and partner, but that he didn't need hand-outs. "A strong France is in Germany's and Europe's interest," the Bundesbank president explained. France and Germany should each take individual responsibility for implementing sensible policies to foster economic growth. It was important for the smooth functioning of the monetary union that the member states did not drift too far apart in terms of economic performance and that they all achieved sustainable growth.