Weidmann: Strengthen national responsibility in monetary union

Bundesbank President Jens Weidmann has cautioned against increasing mutual liability in the euro area and thus weakening the principle of individual national responsibility. Addressing around 50 members of the International Club of Frankfurt Economic Journalists, Mr Weidmann said that while the fiscal rescue measures had prevented the crisis from escalating, they had not made the euro area permanently crisis-proof. "The euro area has still not been stabilised on a sustainable basis," noted Mr Weidmann.

Given the current debate on euro area institutional reforms, the Bundesbank President believes it is crucial that the balance between action and liability is restored. Risks, he pointed out, must only be taken on by those who have the decision-making power to do so. "For me this is the litmus test in assessing reform proposals on the future of the euro area," he said, in reference to the proposals from French President Emmanuel Macron and the European Commission.

Mr Weidmann told the audience that Mr Macron’s proposals went far beyond the stabilisation of the euro area and encompassed, for example, the mutualisation of additional policy areas such as defence, migration and climate protection. In certain areas of policy, he said, a common approach can indeed make more sense than a national approach. Furthermore, when objectives can be better achieved at the Community level, the joint fulfilment of tasks is also compatible with the principle of subsidiarity enshrined in the Maastricht Treaty, he added.

Doubts over restructuring of the ESM

Nevertheless, Mr Weidmann called the stability facility proposed by Mr Macron and the European Commission to cushion asymmetric shocks in the euro area as "unnecessary and not conducive to reaching the desired goal". The European Stability Mechanism (ESM) is already able to step in if a country loses access to the capital market during a crisis, he noted, adding that "any fiscal assistance it provides would be tied to conditions that aim to make public finances more sound and increase the country’s competitiveness." The idea of turning the ESM into a European Monetary Fund (EMF) should be subject to critical scrutiny, he maintained. This, he said, applied in particular if a future EMF were to help a member state by shouldering burdens stemming from a bank resolution, for example. In Mr Weidmann’s view, this could only work if the banks in the euro area first of all reduced their holdings of non-performing loans.

Furthermore, the Bundesbank President does not currently see any political appetite to transfer substantial decision-making powers to the European level. That being the case, there remains "only one way of restoring the balance between action and liability, and that is to strengthen the individual responsibility of the member states." However, for this to happen, the binding effect of European fiscal rules needs to be increased and the disciplining effect of the financial markets boosted, he noted. Mr Weidmann called for an independent institution to take over responsibility for fiscal surveillance from the European Commission. "At least that would clearly show where unbiased analysis ends and political concessions begin," said Mr Weidmann, reminding the audience that the Bundesbank had already made a proposal to strengthen the ESM’s role in fiscal surveillance.

In order for the rules on the sustainability of public finances to work, the market must be allowed to unfurl its disciplining effect, he said. For this to happen, the "no bailout" rule would have to be made more credible, he added. "Investors," he stated, "need to understand that they are taking on a credit risk if they buy government bonds from countries with unsound public finances." A restructuring of government debt, for example via a haircut, needs to be a realistic option while also being manageable for the financial system, he said, while emphasising that the nexus between banks and sovereigns would need to be severed for this to happen. Mr Weidmann also called for an end to the preferential regulatory treatment of government bonds. "If banks could invest in government bonds only to a limited extent and had to back these with sufficient capital, they would be better able to cope with a haircut, should one occur," Mr Weidmann reasoned.

In favour of a swifter end to net asset purchases

In his speech, Mr Weidmann also touched on the ECB Governing Council’s current monetary policy stance. In October, it decided to halve the monthly asset purchases as of January 2018 from €60 billion to €30 billion. At the same time, it decided to continue the purchases until at least September 2018. There was agreement in the Governing Council, in light of the only gradually increasing price pressure in the euro area, that an expansionary monetary policy was still appropriate in principle, said Mr Weidmann. However, he pointed out that projections were showing a more and more robust upswing in the euro area and that domestic price pressures were thus gradually rising. One reason for this was that pay settlements in the euro area were likely to pick up again more strongly. Against this background, Mr Weidmann reaffirmed his stance that a swifter end to the net asset purchases with a clearly communicated end date would have been justifiable. "I say this also because government bond purchases in a monetary union entail particular risks and side-effects," he explained.