"There can be no talk of deflation"

The low inflation rates in the euro area are no reason to loosen monetary policy even more, in the view of Bundesbank President Jens Weidmann. "I also advise that we not succumb to frantic activism but that we now stay on target," he said in an interview with Der Spiegel. The economic indicators in the euro area recently sent thoroughly positive signals, Mr Weidmann continued, saying that a moderate upturn and increasing employment are discernible.

Mr Weidmann said he anticipates that there will be hardly any rise in prices in the coming months, too, and that the inflation rate might even become negative for a time, but inflation will once again approach the target of close to, but below 2% over the medium term. "There can be no talk of deflation in the sense of a destabilising, self-reinforcing downward movement of prices," he emphasised in the interview. "The main reason for the very low inflation rates at present is the slump in the price of oil," Mr Weidmann explained, remarking that its influence on the inflation rate will only be temporary.

The drastic drop in energy prices means that consumers and enterprises, in Germany alone, have almost €25 billion more in their pockets, the Bundesbank President noted. That is, in his view, already a decent stimulus package. "At the moment, I don't see why the central bank should now add to this," he said.

Normalisation of growth rates in China

Despite the economic slowdown seen in China, Mr Weidmann expressed his confidence in the interview that the recovery in Europe would strengthen. "In China I see, above all, a return to normal from rates of growth that were high, perhaps even too high," he said. "That is not necessarily a slump, but a slowdown, which we are also witnessing in other emerging market economies," he continued.

According to Mr Weidmann, developments in China are one of the reasons why the Federal Reserve is hesitating over an interest rate reversal in the USA. He argued that developments abroad play a role in monetary policy decisions, but said that central banks should adhere closely to their mandates – in the Fed's case, this means inflation and the labour market in the USA.

The US economy is recovering, and the Fed has therefore made clear that the interest rate hike is in the offing, Mr Weidmann pointed out. "The key factor is that there was enough time to prepare for it." The emerging market economies, in particular, were well advised to prepare for an interest rate reversal and outflows of capital; they had previously also benefited from low interest rates as a result of capital inflows, Mr Weidmann noted.

Looking at developments in Germany, Mr Weidmann warned against weakening the economy with poor economic policy, citing "a retirement pension policy that takes workers out of the labour market" as an example.

Careless handling of government deficits

The Bundesbank President indicated that Europe's efforts to overcome the crisis are not over yet. "And the euro-area countries mustn't stray from the road towards sound public finances," Mr Weidmann warned during the interview. Italy, for example, seems keen to procrastinate over its budget consolidation, but it is not an isolated case, Mr Weidmann said. "It bothers me to see how carelessly many European governments are handling their government deficits and seeming to rely on monetary policy."

Mr Weidmann said that he does not see the high numbers of refugees in Europe as a reason to water down the Stability Pact, adding that in most countries, the actual costs are likely to be kept in check. "The problem I do see here is that, time and again, justifications are being sought for deferring consolidation," he remarked.

In the light of breaches of agreed debt rules, Mr Weidmann voiced criticism of the European Commission's role as guardian of the European Treaties. "If the Commission sees itself primarily in a political role and feels called upon to negotiate compromises between the member states, then its task of budgetary surveillance is no longer in good hands." He argued that the Commission's tasks relating to fiscal rules should be transferred to an independent fiscal authority: at the end of the day, the finance ministers will still have to take the decision, but in this way it could be ensured that budgetary discipline is not softened before things even get that far.