Jens Weidmann bei einer Rede ©Nils Thies

Weidmann: Large-scale borrowing at the EU level should remain a one-off crisis measure

In an online speech to students and faculty members at Harvard University, Bundesbank President Jens Weidmann outlined the potential long-term economic ramifications of the coronavirus crisis, such as less competitive markets and more inward-looking economies. Young people could be hit particularly hard by problems in the labour market or by learning losses. Turning his attention to the rising level of public debt, Mr Weidmann called for all crisis measures to be temporary in nature so that the resulting budget deficits recede automatically after the crisis. This is all the more important, he argued, given the three fundamental requirements for the future, the first of which is the need to promote sustainable growth by fostering education, digital transformation and the transition to a climate-friendly economy. The second is the need to bear the financial burden of the ageing of our societies. Last but not least, governments need to restore their fiscal capacities so that they can weather the next crisis as well. From the perspective of a central banker, there is another aspect to sound public finances: “The higher the level of public debt, the harder it may become for monetary policymakers to raise key interest rates if the price outlook requires it,” Mr Weidmann explained. Central banks might increasingly come under pressure to keep government financing costs low, running the risk of ultimately losing their independence.

Joint EU borrowing should remain an exception

Mr Weidmann expressed unease about the EU's extensive joint borrowing to finance the Recovery and Resilience Facility in response to the coronavirus crisis. “What is worrying is the large-scale borrowing at the EU level […] This kind of borrowing should remain a one-off crisis measure,” he asserted, stating that permanently raising joint debt does not square with the EU’s institutional framework. Shifting financial liability to the Community level would require Member States to transfer their fiscal policy powers to that level, too. “Much closer political integration would be needed and, eventually, the EU would have to evolve into a democratic federal state,” he pointed out. One alternative would be to strengthen national fiscal responsibility in the euro area so that it is up to each Member State to keep its public finances on a solid footing. But the choice of whether to push for deeper political integration or greater individual responsibility is a decision that should be made by the citizens of Europe, not by central bankers.

Monetary policy can only help up to a point

Mr Weidmann also used his speech to talk about monetary policy’s part in combating the fallout of the coronavirus crisis, but stressed that monetary policy does have its limits. Expansionary monetary policy is important at a time when the inflation outlook is clouded by an economic slump and a lack of liquidity in the financial system could aggravate the crisis, he argued. Without it, harmful feedback loops could emerge and ultimately jeopardise price stability. He explained that while monetary policy can help to stabilise the economy, it is unable to correct the economic dislocations caused by the pandemic shock. “Monetary policy can only help in those cases where liquidity is scarce or interest rates are too high, but it cannot make up for the loss of income due to payments not made,” Mr Weidmann remarked. This is where fiscal transfers are needed to directly address the problem.