29 August 2012

Bundesbank/Weidmann: 'Too close to state financing via the money press'

Jens Weidmann has made a name for himself by championing price stability and opposing bond purchases by the ECB. In a SPIEGEL interview, he criticises the ECB's latest plans and insists he only wants to secure the euro's long-term future.

SPIEGEL: Government spending is being reduced and reforms are being introduced across Southern Europe, but the financial markets don't seem to recognise this progress and are pushing up interest rates on sovereign bonds to dizzying heights. Why are you opposed to European Central Bank (ECB) President Mario Draghi's plans to purchase large quantities of Southern European sovereign bonds to ease the situation?

Weidmann: I was already critical of the sovereign bond purchases that have been made to date -- and I was by no means alone in that respect. Such a policy is too close to state financing via the money press for me. The central bank cannot fundamentally solve the problems this way. It runs the risk of creating new problems.

SPIEGEL: Your colleague at the ECB, Jörg Asmussen, with whom you studied at university and worked together for the German government for a long time, says "stability policy" is about not allowing any doubt whatsoever to arise concerning the currency and its continued existence. Would you say he's right?

Weidmann: I totally agree with Jörg Asmussen that no doubt can be allowed to arise concerning the character of the euro as a stable currency and its continued existence. This is precisely why we shouldn't act according to the motto "necessity knows no laws". There are good reasons why we have clearly defined, separate areas of responsibility. The central bank is responsible for monetary stability, while national and European politicians decide on the composition of the monetary union. It wasn't the central banks that decided which countries are allowed to join the monetary union, but rather the governments.

SPIEGEL: Are you implying that some Member States would have to leave the eurozone under certain circumstances?

Weidmann: If the central bank were obliged to guarantee that Member States remain in the eurozone at all costs, it could come into conflict with its key mission of maintaining price stability. I also don't see how it's possible to fundamentally rule out that a sovereign Member State might decide to leave the monetary union.

SPIEGEL: You are asking a great deal of politicians. Isn't it fair if the central bank also makes a contribution and is prepared to purchase sovereign bonds, as ECB President Draghi has proposed? After all, this is merely intended as a temporary measure.

Weidmann: That's the hope. But it will be extremely difficult to close that door again, once it's been opened. The bonanza from the central banks would raise expectations (that it would keep happening) and result in a collectivisation of risks.

SPIEGEL: You already said some time ago that the central bank had pushed its mandate to the limit. Will Draghi's new plans cause it to overstep this limit?

Weidmann: At any rate, I would like to avoid seeing monetary policy fall under the dominance of fiscal policy.

SPIEGEL: Our question is rather whether Draghi's plans are compatible with the current treaties and thus legal.

Weidmann: As a central bank president, I prefer to argue along economic lines. I don't want to comment on legal opinions here. What's important to me is taking a well-founded position that is sustainable in the long term. Moreover, we shouldn't underestimate the danger that central bank financing can become addictive like a drug.

SPIEGEL: But Draghi only wants to provide money if a country submits to a strict reform programme. Isn't that a way to provide assistance without writing a blank cheque?

Weidmann: At first glance, this of course looks like a good idea. But at second glance, it becomes clear that it leads to coordinated actions between the government rescue funds and the central bank. This results in a linking of fiscal and monetary policy.

SPIEGEL: Many of your central bank colleagues appear increasingly irritated by the endless objections of the Bundesbank. ECB head Draghi recently publicly named you as an opponent of his plans. Isn't that breaking a taboo?

Weidmann: On the contrary, I see transparency as important in the current situation. We central bankers are now operating in a grey zone and an increasing number of fundamental issues are coming to the fore. So we have to be prepared to publicly comment on the positions that we take on the council.

SPIEGEL: Can you at least be certain that the German government stands behind you on this issue?

Weidmann: I support the positions that I believe are appropriate as the Bundesbank president and a member of the ECB Governing Council. In doing so, I don't take my cue from the German government's position. That's part of being independent.

SPIEGEL: Even members of governments such as Finnish Prime Minister Jyrki Katainen are now publicly questioning whether the monetary union has a chance of being saved this way. Has the euro rescue failed?

Weidmann: I see no reason for such fears. The heads of government of the eurozone have just recently expressed their clear commitment to the euro, and I am confident that they are aware of their responsibilities and will take appropriate action. Ireland and Portugal have already made remarkable progress with their reforms. I also view the initiatives in Spain and Italy as positive. Fiscal rescue mechanisms are available for emergencies, and politicians can decide on their structure and volumes. They can, in the correct order, take additional steps toward integration. All of this is doable. What I don't agree with is that some people are conveying the impression that in the crisis only the central bank can prevent a supposedly critical increase in interest rates. The best way to reduce interest rates over the long term is to decisively implement promises and agreements.

Full interview

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