10 May 2013

Bundesbank/Weidmann: Germany shows - Reforms pay off

"Short-lived pump-priming and spending programmes and ever-larger debts for subsequent generations will not create sustainable employment", said Bundesbank President Jens Weidmann in an interview with the Westdeutsche Allgemeine Zeitung.

The ECB recently announced an interest rate reduction to an historically low level. A lot of economists are saying that it will not produce the desired result of increased lending to enterprises in the southern European crisis countries.

I said before that the effectiveness of an interest rate reduction at present should not be overestimated. The problems are actually a lack of confidence and the need for comprehensive reform. These problems cannot be resolved by monetary policy.

In real terms we have now had negative interest rates for some time – this cannot be a good thing on a lasting basis.

We are in a quite particular situation. Prospects for the euro area economy have dimmed, and price pressure is declining. Therefore, monetary policy is quite rightly very expansionary. It will be crucial to normalise interest rates rapidly when the situation brightens. Low interest rates are certainly not a lasting solution.

Interest rates differ widely across euro area countries. If a small or medium-sized enterprise in Italy or Spain has to pay several times as much interest as in the north, that distorts competition.

Actually, I would be somewhat more circumspect. A uniform interest rate level cannot be an objective of monetary policy, nor would it be a sign of a well-functioning internal market. The interest rate applying to a capital investment project is an expression of the opportunities and risks which the project entails. If one enterprise’s prospects are not as good as another’s, that is quite rightly reflected in different interest rates. The economic and political environment in the relevant countries also plays a role here, of course.

You are against the unlimited buying up of government bonds because it removes the pressure to reform?

The buying up of government bonds cures symptoms at best, but does not treat underlying causes. We agree on that in the ECB Governing Council. At most, it allows you to buy time, but also entails the risk that the pressure to reform in the relevant countries will abate.

But that is not your only objection?

By purchasing government bonds, we at the central banks are taking the associated risks onto our own balance sheet. To this extent, mutualised liability on the part of Europe’s taxpayers is created. This blurs the boundary between ECB monetary policy and national fiscal policy.

What would be so bad about going back to the Deutsche Mark?

The euro is our currency. I am resolutely committed to preserving the monetary union as a stability union. A collapse of the euro would lead to dramatic upheaval. However, keeping the monetary union together is ultimately a political task; at the central bank, we are responsible for price stability.

Would you like to see a deeper union, for instance with a common fiscal and economic policy?

When the monetary union was set up, two models were discussed: a model of national states taking responsibility for themselves and not bearing liability for each other, and a model of political union. Europe chose the first option, and I do not currently see political majorities for any far-reaching surrender of national sovereignty. However, with the crisis measures we are assuming ever more liability. What we need to do now is to get liability and control back in balance.

For that reason, issuing joint government bonds, eurobonds, is not an option for you?

Mutual liability could only be the last step at the end of a process of integration. After all, you would not want to share a joint credit card with your neighbours without joint control.

Full interview

© Deutsche Bundesbank