"Purchase of government bonds harbours risks"
Bundesbank President Jens Weidmann is sceptical about the ECB Governing Council's recent decision to purchase government bonds. He made his reservations clear during interviews with German newspapers "Bild" and "Welt am Sonntag" as well as the ARD television programme "Bericht aus Berlin" at the weekend.
"In the context of monetary union, purchasing government bonds is not like purchasing any other instrument. It harbours risks," Weidmann said in an interview with "Bild" on Saturday. The threshold for using such an instrument should therefore be set very high, he said on "Bericht aus Berlin".
€60 billion a month
A few days ago, the Governing Council of the European Central Bank (ECB) decided on an extended asset purchase programme, envisaged to start in March 2015. The decision will see the ECB and the national central banks in the euro area purchasing government bonds in the future, in addition to their existing private sector asset purchase programmes. From the ECB Governing Councils perspective, the objective of the programme is to fulfil its mandate of maintaining price stability.
In this way, the ECB plans to set incentives for enterprises and households to increase investment and consumption, among other things by lowering interest rates further. The ECB hopes that the stimulation of economic activity should ultimately result in the euro area's inflation rate approaching a level of 2% again.
Monthly asset purchases totalling €60 billion are envisaged. It is intended that the purchases will be carried out until September 2016 and in any case until the ECB Governing Council sees a sustained adjustment in the path of inflation. For this purpose, the ECB will buy bonds issued by euro-area central governments, agencies and European institutions in the secondary market against central bank money. Any losses resulting from purchases of securities of European institutions are to be borne jointly by the central banks in the Eurosystem. These purchases will add up to 12%. In addition, the ECB will purchase 8% of the assets. This implies that 20% of the additional purchases will be subject to a regime of risk sharing. The remaining 80% of the asset purchases, carried out by the national central banks of the Eurosystem, will not be subject to loss sharing. The distribution of asset purchases among the individual national central banks is based on their respective share in the capital of the ECB.
"This, plus a number of other features, will mitigate at least some of the problems which sovereign bond purchases entail," Weidmann told "Welt am Sonntag".
No sign of deflation
Weidmann justified his reservations against the expanded purchase programme by saying that he did not consider such a far-reaching step necessary at present. He added that although the weak prices do not put monetary policymakers in an easy position, he believes at present that the risk of deflation, a dangerous downward spiral driven by falling wages and prices in which aggregate demand decreases, is very low. He pointed out that the currently low inflation rates are driven by two factors: first, by the adjustment processes in the crisis countries and second, and most notably, by the low oil prices.
"They have the effect of a small stimulus package. They support the purchasing power of consumers and lead to higher profits for enterprises," Weidmann explained on "Bericht aus Berlin". This, he added, raises the question of whether monetary policymakers need to add anything on top of that. It would be plausible for the central banks not to react to the low inflation rates that are related to the oil price, as long as no second-round effects occurred, Weidmann told "Welt am Sonntag".
Responsibility of crisis countries and European Commission
The purchase of government bonds would reduce the pressure on crisis countries to reform.
"That entails the risk that sound budgeting might take the back seat," Weidmann said in his interview with "Bild". It would be dangerous, however, not to continue along the course that has been embarked upon, the Bundesbank President explained. Like ECB President Mario Draghi, he pointed out that the ECB cannot solve the deep-seated problems facing the euro-area countries. "They have to do that themselves," he stressed. He pointed out that further reforms, for example in the labour market, and a credible budgetary policy with less debt, are required to achieve this. Now policymakers need to do what is necessary, he added during his interview with ARD. He considers it the responsibility of the European Commission not to soften the budgetary rules further.
The Bundesbank President also fears that the central banks could now be compelled to take even further action.
"If a country is stifled by debt, the central bank might come under pressure to take more and more steps to ease the burden," Weidmann stated in his interview with "Welt am Sonntag". He warned that the ECB's programme would
"certainly not decrease" this pressure. After all, the central banks would now be the euro-area countries' biggest creditors.
Weidmann also pointed out the danger of negative effects on the financial markets.
"The risk of exaggerations certainly increases, but we see no signs in the German real estate market of a bubble emerging," Weidmann told "Welt am Sonntag". The immediate and fully intended outcome of the bond purchases is to push down interest rates, he said.
"This makes investment and consumption more attractive, and increases investors' propensity to seek out higher yielding and riskier investments," he added.