"Problematic proximity to fiscal policy"
Bundesbank President Jens Weidmann has warned that too much is being asked of monetary policy.
"The central banks are overburdened with expectations," Mr Weidmann commented in an interview with the Italian newspaper La Stampa, France's Le Monde, the British Guardian and Germany's Süddeutsche Zeitung.
The European Central Bank can't solve every problem, according to the President of the Bundesbank, who argues that central bank action is seen as the solution to all conceivable problems, going far beyond the scope of monetary policy. During the crisis, the ECB was often called the only euro-area player capable of acting, even in the frequent cases when it was obvious that many problems actually had to be resolved politically, Mr Weidmann remarked, pointing out that this was also the case in the wake of the Brexit vote.
"This undermines market discipline"
The financial crisis and political indecision, Mr Weidmann contended, had pushed central banks into this new role.
"As a result, we are intervening more and more in individual markets, and today our proximity to fiscal policy is problematic." The Bundesbank President argued that the Eurosystem has become the largest creditor of the euro-area countries, and that finance ministers receive money back from the government bonds in central bank balance sheets by way of central bank profits, no matter how sound their respective public finances are.
"This undermines market discipline and can make it more difficult for us to find our way back out of the expansionary monetary policy and its non-standard measures," Mr Weidmann noted.
He highlighted another factor that the ECB Governing Council should not ignore: the risks presented by the ultra-accommodative monetary policy stance, which will mount in size the longer the low-interest-rate period lasts.
"Under no circumstances should interest rates be kept this low for longer than strictly necessary from a price stability angle," Mr Weidmann stressed. He went on to say that central banks shouldn't let the problems that individual financial institutions or government budgets might face prevent them from normalising monetary policy when the time is right to do so.
Potentially conflicting objectives
During the interview, the Bundesbank President also made the case for a clear separation of monetary policy and banking supervision – both are the responsibility of the ECB Governing Council – and justified this by pointing to possible conflicting objectives.
"As the banking supervisor, [the ECB
Governing Council] might struggle to take tough action against a bank or even to work towards its resolution, knowing that it is that bank's largest creditor due to its monetary policy measures," Mr Weidmann stated. On the other hand, he continued, as the monetary policymaker, the ECB Governing Council could find it hard to raise the key interest rate if it is concerned that any problems the banks might have with the rate hike would fall to it as the supervisor. However, as Mr Weidmann clarified, the segregation of the two policy areas would require amendments to the EU treaties, which is currently unrealistic.
The Bundesbank President perceives a growing divide between the European Union and its citizens.
"For many of its citizens, Europe has indeed lost its shine and become a projection screen for the downsides of globalisation and migration." Likewise, he noted that the usual instincts of the institutions to answer crises with more integration no longer resonates with the public, and he reasoned that integration cannot be an end in itself, it has to make sense. There is currently no willingness in the EU to establish a political union, according to Mr Weidmann, who believes the only alternative for a functioning monetary union is to bolster the individual national responsibility of member states:
"A start could be made, say, by introducing an insolvency regime for sovereigns or an independent fiscal authority that monitors compliance with the budgetary rules more strictly than the European Commission currently does."