"Monetary policy has ventured deep into uncharted territory"

In a recent speech, Bundesbank President Jens Weidmann took a critical view of the latest package of measures adopted by the Governing Council of the European Central Bank (ECB). "European monetary policy has ventured deep into uncharted territory, and there is a growing risk of it being subjugated to fiscal policy," he said at the second Finance Forum Liechtenstein in Vaduz. He cautioned against underestimating the risks posed by the ultra-loose monetary policy and overestimating the capabilities of monetary policy. The Bundesbank President said that what was required instead to stabilise the monetary union in the long term was to restore the balance between action and liability and to effectively reduce banks' dependence on the solvency of states. 

On 10 March, the ECB Governing Council eased its monetary policy stance once again. The measures adopted included cutting key interest rates further, agreeing new long-term refinancing operations with highly favourable terms and expanding the monthly bond purchases from €60 billion to €80 billion. 

Package of measures unconvincing

Mr Weidmann pointed out that, while core inflation – which factors out volatile components such as food and energy prices – had recently fallen unexpectedly, it was still too early to say for sure whether this drop in the core rate was temporary or permanent. The Bundesbank President sees no evidence so far to suggest any de-anchoring of inflation expectations and thus the risk of an excessively low inflation rate taking hold. 

He accepted that, overall, the changed inflation scenario indeed posed a challenge to monetary policy and signalled a need for action, adding that there was a consensus about this in the ECB Governing Council. "However, I think the decisions go too far when looking at the bigger picture, and I find the comprehensive package of measures unconvincing," he concluded. 

The Bundesbank President considers that, despite the recent deterioration in the outlook for prices and growth, the purchase of government bonds remains unnecessary. He warned that deploying what he considers an "instrument of last resort" entails a dangerous blurring of monetary policy and fiscal policy. Jens Weidmann urged monetary policymakers to be aware that the persistent low-interest-rate policy and the non-standard monetary measures also entail risks. "One expression of this is that the ECB Governing Council is having to fend off increasingly absurd demands – such as showering the population with 'helicopter money'," he continued. 

Rising risk of financial market bubbles, falling pressure to reform

Mr Weidmann pointed to the rising risk of financial market bubbles, which had prompted several euro-area member states to take "macroprudential measures" in order to, for instance, prevent exaggerations in the real estate market. But, while emerging risks to financial stability would need to be addressed primarily by macroprudential policy, a monetary policy aimed at ensuring longer-term price stability could not completely ignore such risks to financial stability, he explained. "At the end of the day, risks to financial stability ultimately also threaten price stability – as was clearly shown by the financial crisis," said Mr Weidmann. 

The Bundesbank President also warned that the ultra-loose monetary policy, with its ballooning government bond purchases, could lower the pressure on euro-area member states to consolidate and reform. "These bond purchases are increasingly fusing monetary policy and fiscal policy," he cautioned. He said that, for a major part of sovereign debt, government funding costs had since become decoupled from capital market conditions, resulting in a weakening of market discipline. "The chance offered by the low interest rates to run down budget deficits faster has been squandered," Mr Weidmann remarked in light of the euro-area countries' fiscal policies. 

He took a critical view of calls to expand the mutualisation of risks without simultaneously surrendering part of national sovereignty. He warned that as long as the euro-area member states clung to national decision-making, increased risk-sharing in the policy fields affected would undermine the stability foundations of monetary union. The Bundesbank President specifically alluded to a single European deposit insurance scheme. In Mr Weidmann's view, this would not only be a premature move but would also create incentives to transfer risks to the banking system that would then have to be shouldered by everyone.