13 June 2013

Bundesbank/Weidmann: Crisis economics - The crisis as a challenge for economists

Speaking in Munich, Weidmann looked at the role economists had played in the euro crisis. He outlined his vision for a "Maastricht 2.0" and stressed the need for intelligent financial regulation and a crisis-proof framework for monetary union.

Much as engineers are accused of making buildings that are not earthquake-resistant, economists are accused of building design flaws into the financial and economic system, with whole nations now suffering under the consequences... Over the course of time, economists have gained a fair amount of influence in policymaking, too, while the opponents of this development have long been branding it as the “economisation” of politics and society. With the 2007 financial crisis and the ensuing critical developments, unease about economists clearly grew... In my view, the accusations levelled against economists are, at best, only partly justified however...

In the course of the crisis, central banks were entrusted with ever more responsibility – both officially and unofficially. ESCB central banks play a central role in macro-prudential supervision, i.e. as part of the European Systemic Risk Board, and the Bundesbank forms an integral part of the German Financial Stability Committee. The European single supervisory mechanism is to be placed under the aegis of the European Central Bank (ECB).

Furthermore, in the wake of the crisis, policymakers, the markets and the media have talked up the Eurosystem as the only body capable of taking action. However, this entails the risk of overloading central banks with too many tasks and too much responsibility.

The cornerstones of the Maastricht framework include the concept of an independent central bank with the primary objective of safeguarding price stability, and national sovereignty in fiscal policy matters. The framework assigns liability for and control over national finances to national governments. When monetary policy, however, is called upon to carry out fiscal tasks, it will sooner or later lose its ability to maintain stable prices. Furthermore, we should only go down the avenue of comprehensively mutualising liability if the shift in liability to the European level is accompanied by the transfer of control. However, there are no signs that Member States are willing to hand over veritable control and intervention rights to Brussels.

Maastricht 2.0

It is impossible to say with absolute certainty whether a monetary union is crisis-proof. Economists had identified design flaws and pointed them out beforehand. In many respects, however, policymakers at the time ignored the advice given by economists. As long as political union still does not enjoy the backing of the European general public and their governments, then strengthening the Maastricht framework by introducing something like "Maastricht 2.0" is the right approach to return stability to monetary union.

Maastricht 2.0 means strengthening the principle of national responsibility by reinforcing the regulatory framework and, in doing so, realigning liability and control. It means keeping the crisis mechanism as a last resort for staving off threats to financial stability in the euro area. Nonetheless, sovereign default and bank insolvencies must be possible in future without posing too large a risk to financial stability; this includes, I believe, bringing an end to the regulatory privileges enjoyed by sovereign debt. It also means establishing a banking union, encompassing both a single supervisory mechanism for systemically important financial institutions and a clear-cut resolution and restructuring regime.

In conclusion, Weidmann remarked that economists needed to face up to these questions and critically assess their own roles and responsibilities. He summarised:

"We need an intelligent financial market regulation. We need to keep a closer eye on the stability of the financial system. And we need a crisis-proof framework for monetary union. Yet, independent monetary policy that is geared to safeguarding price stability and is clearly segregated from fiscal policy, has not been rendered obsolete by the crisis – quite the opposite, in fact, it is more important than ever before."

Full speech

© Deutsche Bundesbank