"Sustainable growth cannot be built on a mountain of debt"

Bundesbank President Jens Weidmann has criticised the flagging enthusiasm for saving in many euro-area countries and the – in his view – overly flexible application of the rules of the Stability and Growth Pact. "Rules are of no use if we are not willing to apply them strictly," Mr Weidmann told the Politisches Forum Ruhr in Essen.

Mr Weidmann warned that monetary policymakers could be forced to clean up the mess made by others. "There is always a risk that other areas of policy will shy away from unpleasant measures and rely on monetary policy to sort things out," he said. Monetary policy should not be used to mask the solvency problems of governments or banks. The acid test for monetary policy would arrive as soon as the price outlook indicated a normalisation of interest rates, said the Bundesbank President.

No "German austerity diktat"

Mr Weidmann explained that the Eurosystem's ultra-expansionary monetary policy had significantly weakened the disciplining effect of the financial markets on fiscal policy, and that lower interest costs had eased budgets substantially. "No wonder consolidation and reform efforts in a number of European capitals have flagged since the peak of the sovereign debt crisis," he continued. Mr Weidmann pointed out that without the adjustment programmes and the accompanying financial aid, the European crisis countries would have had to undergo a far more rapid and abrupt adjustment process. The programmes had bought the countries time to put their finances in order after financial markets had lost confidence in them. "That is something for those who label the agreed programme conditions as a 'German austerity diktat' or 'austerity policy' to consider," he said.

According to the Bundesbank President, the member states particularly severely affected by the crisis had already achieved a great deal. Portugal and Spain had improved their structural budget balances by around seven percentage points since 2009, while Greece had managed an improvement of 16 percentage points. "These are substantial consolidation results that deserve respect," said Mr Weidmann.

However, from his point of view, the situation in Greece remains precarious. Greece's debt-to-GDP ratio has meanwhile risen to over 170 percent. Mr Weidmann called on the country to continue the path of reform already embarked upon. "It is essential for Greece to develop a well-functioning public administration, steer its economy and public finances towards a sustainable path and, above all, create confidence in a reliable reform course." However, according to Mr Weidmann, the new Greek government had dashed initial hopes. He said that Greece had been too slow to implement structural reforms in various areas over the last five years, most notably in collecting taxes, fighting corruption and improving the work of public administration.

Sound public finances a key prerequisite for stability

Mr Weidmann went on to say that the example of Spain showed that savings and reform measures would pay off. "The Spanish economy has long since left the recession behind and is forecast to grow strongly," he continued. He pointed out that the "worryingly high levels of unemployment" were also decreasing gradually. The Bundesbank President made it clear that sound public finances were a key prerequisite for the stability of the euro. From his point of view, sound finances do not stand in the way of economic growth. "Sustainable growth cannot be built on a mountain of debt," he said.

Mr Weidmann criticised the application of the Stability and Growth Pact rules, which he considered too flexible. Furthermore, the changes had made the rules much more complex, reducing their binding force. "So much scope for interpretation and discretion has been opened up that it is now almost impossible to judge whether the rules are actually being adhered to," Mr Weidmann told the audience. He called for strict implementation of the fiscal rules, saying that a monetary union consisting of sovereign states could only function on the basis of clear rules that all members must follow.

"I find the treatment of France's budgetary deficits extremely problematic with regard to the binding force of the rules," the Bundesbank President commented. As the second-largest economy in the euro area, France should, he said, lead by example.