13 September 2011

Jens Weidmann: The crisis as a challenge for the euro area

In his speech to the Verband der Familienunternehmer in Cologne, Deutsche Bundesbank President, Dr Jens Weidmann, said it was crucial to structure the institutional framework for European Monetary Union so that it is stable, inspires confidence and lends credibility to short-term crisis management.

"As political efforts are being undertaken to solve the urgent problems associated with the sovereign debt crisis and alleviate its symptoms, there is a danger of many people losing confidence in decision-makers, agreements and institutions. People in Germany – and elsewhere – are worried about their currency. And I take these concerns very seriously. However, we must not forget that the Eurosystem can boast some remarkable successes in fulfilling its mandate. The euro’s record on internal and external value stability is comparable to that of the Deutsche Mark. Along with the single currency’s economic and political significance, we must not forget this fact when discussing the current crisis.

"Maintaining confidence in the euro requires, among other steps, the construction of a sustainable bridge between short-term crisis measures and a credible and stability-orientated framework for monetary union. There needs to be an institutional framework that offers a clear, coherent outlook and provides incentives for the individual parties to act reliably and sustainably. Having this outlook in place will make it easier to allay the short-term difficulties and ease the current tensions. This is the broad framework that we need for European Monetary Union.

"First and foremost, extensive consolidation and reform measures now need to be implemented in the countries that are experiencing difficulties in order to restore confidence in the stability of public finances, re-establish competitiveness and ensure a healthy national financial system. The first steps towards achieving this have already been taken. In some areas, however, there is a long road ahead. In addition, comprehensive changes must be made to financial market regulation and supervision to make the financial system more resilient. The resolutions expected at the G20 summit in Cannes will be another important step towards this objective.  Moreover, the institutional framework for monetary union must be adjusted so as to achieve the right balance between the responsibility of individual countries, liability and monitoring. My greatest concern is the current lack of a coherent outlook in this area. The steps announced, and those already taken, have shifted the balance of the framework in a direction that is not sustainable in the long term. This threatens to harm the public standing of the euro substantially.

"In principle, I think that there are two economically sustainable approaches to designing a stability-oriented monetary union for the future. The first would be a return to the founding principles of the system agreed in the treaties, which still essentially applies; this would entail having European rules for national fiscal policy, countries retaining their fundamental fiscal policy independence, applying the no bail-out principle and financial markets disciplining fiscal policy. Despite all the comments to the contrary, I still believe that it is possible to stabilise and consolidate this framework successfully. The other approach would be to embark upon a major shift entailing a fundamental change in the federal structure of the EU. This would involve a transfer of national responsibilities, particularly for borrowing and incurring debt, to the EU.

"I believe that political leaders need to take a prompt decision on which of these two routes to take. The middle road of communitising liability whilst retaining independent national fiscal policies threatens to be derailed by its own inconsistency. It would endanger the survival of a stability-orientated monetary union, and thus also the European integration achieved thus far.

"I believe that the current developments are of vital importance for the future of the euro. The democratically elected parliaments must decide on the future fundamental design of European Monetary Union. This could mean maintaining the agreed framework and correcting the incentives so that they are conducive to stability. Alternatively, it could involve undertaking a major shift to a fiscal union, including a fundamental transfer of key areas of responsibility from national parliaments to democratically legitimised European bodies. However, I believe that the middle road embarked upon through some recent decisions is leading us in a direction that is not stable in the long term."

Full speech

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