"We have come to a crossroads"

Bundesbank President Jens Weidmann has called on European governments to make a decision: relinquish sovereign rights or step up individual national responsibility. The middle course that has been pursued thus far has bought us time. "Sooner or later, a pivotal decision has to be taken if we want to safeguard the monetary union as a union of stability," Mr Weidmann said in a joint interview with the German weekly newspaper Die Zeit and the Italian daily newspaper Corriere della Sera.

Mr Weidmann does not see any willingness on the part of Germany or Italy to create closer community ties and to transfer rights of sovereignty to the European level. In his opinion, it is essential for both investors and the member states to return to the principle of individual national responsibility, as is enshrined in the Maastricht Treaty. But that will only function, he said, if it is ultimately possible to cope with a government default without the financial system collapsing. "For that reason, we also need a stronger decoupling of banks and sovereigns as well as an orderly procedure for dealing with government financing problems," Weidmann added.

"Fair-weather event"

In the interview, Mr Weidmann took a critical view of the high level of sovereign debt in Italy. "A debt-to-GDP ratio of over 130% is more than twice the agreed threshold figure," he said, adding that "high debt ratios have to be reduced rapidly". Furthermore, he emphasised the importance of not undermining market discipline and of implementing the fiscal rules.

Mr Weidmann consequently showed no understanding for the European Commission's decision to forgo imposing financial sanctions on Portugal and Spain, despite their government deficits having breached the budget deficit limits. "In my view, the Commission and the European Council are not consistent enough," the Bundesbank President said. "Breaches of the rules have to have consequences at some stage," he stressed.

According to Mr Weidmann, special treatment for political reasons must not be allowed, as otherwise "the rules become a fair-weather event and fail to exert any binding force". Furthermore, it is easier for governments to push through consolidation in political terms if the rules are not up for negotiation at all times, he added. "It is my perception that acceptance of the EU among the general public is also suffering from the fact that our jointly agreed rules are not being complied with," he said.

Single monetary policy

With regard to the future monetary policy stance in the euro area, Mr Weidmann stressed that the already very low interest rates did not represent an obstacle to investment. "Furthermore, we expect a gradual economic improvement and inflation rates to go up in the direction of our definition of price stability," he explained. The ECB Governing Council has defined price stability as a year-on-year increase in the annual inflation rate of below, but close to, 2% in the medium term.

"The effect of the ultra-accommodative monetary policy is lessening over time, and the risks and side effects are increasing," emphasised Mr Weidmann. In light of the marked uncertainty resulting from the Brexit vote, Mr Weidmann recommended waiting, first of all, for the economic indicators to emerge.

As for the Eurosystem's bond purchase programme, Mr Weidmann said that there were possibilities of adjustment. "But, as I see it, we have to be very careful in terms of how we go about it," he added. "The country quotas according to ECB capital shares, for instance, have a purpose and are aimed, among other things, at the consistency of monetary policy," he explained. "If we grant special terms and conditions to individual countries or focus more strongly on very highly indebted countries, we are blurring the lines between monetary policy and fiscal policy more and more," he said. "Ultimately, that might also lead to pressure to keep interest rates at a low level for longer than is necessary with regard to prices if highly indebted countries are unable to cope with a hike in interest rates."