Weidmann: risks and side-effects on the rise

Bundesbank President Jens Weidmann has cautioned that the Eurosystem's ultra-loose monetary policy not only brings mounting risks and side-effects but also becomes increasingly blunt over time. Speaking in an interview with the Tagesspiegel newspaper, he cited excesses in the financial markets and the problems faced by life insurers as examples of these risks.

Since March 2015, the Eurosystem central banks have been purchasing around €60 billion worth of securities every month as part of a programme focusing on government bonds but also including covered bonds and ABSs. They have also slashed the policy rate to almost zero and made unlimited volumes of liquidity available to banks furnishing collateral.

Commenting on the current speculation that the Eurosystem might expand its asset purchases still further, Mr Weidmann told the newspaper that the Eurosystem’s economists were in the process of preparing new projections and that these data would be fed into the ECB Governing Council's policy decision in early December. One factor which, in Mr Weidmann's eyes, deserves continued attention is the fact that the very low rate of inflation is due, in no small part, to low energy prices, making it a transitory phenomenon. "Another is that the cheaper energy we in the euro area are importing is buoying corporate and household purchasing power," Mr Weidmann noted.

Turning to the Eurosystem's asset purchase programme as it currently stands, the Bundesbank President stressed that each central bank is only buying government bonds issued by its home country and that there is very little mutualisation of sovereign debts via the central banks' balance sheets. That decision is the end-result of an "intense Governing Council debate", he emphasised. "But even with those adjustments in place, I still have my concerns over the increasingly close nexus between monetary and fiscal policy," he said.

Structural reforms needed to overcome the crisis

Politicians should not be allowed to take the Eurosystem hostage, Mr Weidmann explained. "We central bankers need to be able to exit the expansionary monetary policy when the time is right to do so, even if that means ruffling politicians' feathers because it increases the interest bill on public debt." Central banks are powerless to resolve the problems facing the euro area, he noted, stressing that structural reforms, above all else, were needed to overcome the crisis. It is not only a question of economic problems, he remarked; there is also the matter of dysfunction and excesses, in the financial sector and elsewhere. "It’s politicians who have the key to resolving the euro-area crisis," he told the Tagesspiegel, adding that it was up to them to lay the foundation for stronger, sustainable economic growth, for a resilient financial system and for a sound long-term fiscal position. As the crisis has shown, sound public finances, in particular, are a vital requirement for a stable monetary union and, ultimately, for stable money, too, said the Bundesbank President.

Do not jettison the Stability and Growth Pact

In the current debate over the influx of refugees to Europe and its financial cost, Mr Weidmann warned against watering down the stability criteria in the euro area. "The Stability and Growth Pact really doesn’t lack flexibility", he asserted. After all, the rules do allow for the recognition of extraordinary and unexpected strains on individual countries. In actual fact, unprecedented numbers of refugees are only affecting a small number of countries, he explained. "The problem I do see, however, is that, time and again, people have been looking for a reason to jettison the widely unpopular Stability and Growth Pact," he cautioned. It would be wrong to misappropriate the refugee crisis for this purpose, Mr Weidmann said.