Translated from the German
In his statement on Tuesday, Weidmann pointed out that the Bundesbank had always, since the first preparations for a monetary union and certainly since the introduction of the euro in Germany, stood up for that fact that the euro was to remain a stable currency. The Eurosystem, he said, stood united in that its core task lay in the preservation of price stability. However, "with regard to the stability orientated nature of the monetary union I consider specific measures that have been taken by the euro system to fight the crisis as problematic", he continued.
Since its beginning, the monetary union had been built upon a strong stability-orientated foundation. Given the specific characteristics of the monetary union, this was more clearly pronounced in the euro area than in other currency areas: whilst monetary policy was communalised, financial and economic policies remained the responsibility of the Member States. Therefore the ECB's monetary policy was independent and its primary objective was price stability, with a clear prohibition of monetary financing of Member States.
"The crisis has also highlighted the importance of financial stability for monetary policy", Weidmann elaborated. "Turmoil in the financial markets have not only high economic costs, they can also significantly affect price development. Monetary policy is now faced with a challenge: Financial stability is instrumental in fulfilling the monetary policy's objectives and at the same time monetary policy is influencing financial stability with its actions, and has contributed more than once in preventing a further escalation of the crisis. But within its mandate, European monetary policy alone cannot guarantee financial stability without compromising on price stability."
Therefore, he explained, the Eurosystem could contribute within its means to financial stability, but if in doubt would have to prioritise the goal of price stability and compliance with its mandate over the aim to ensure the stability of the financial system - for example with regard to secure solvency of banks or states.
"Currently, the price outlook for the euro area is in line with the notion of price stability of the Eurosystem. This is not least due to the announcement of the OMT programme, more precisely, the expectation of potentially unlimited purchases of government bonds. But if the monetary union is to be preserved as a stability union, the crisis management has to keep in mind not only the short-term easing of tenstions on the financial markets, but also the long-term effects of such policies. Against this background, I see considerable stability problems involved in the programmes for the purchase of government bonds by the Eurosystem", he declared.
Although in times of crisis the boundaries between monetary and fiscal policy were inevitably blurred, he maintained that in concrete actions sufficient distance between monetary state financing and fiscal challenges had to be kept. Responsibilities of monetary and fiscal policy should not be mixed by the Eurosystem buying government bonds of countries who have lost the confidence of the capital markets, as this involved a non-negligible risk to the credibility of central banks and their ability to maintain price stability.
It was crucial to identify that the problems and their solutions did not lie with the monetary policy of the ECB, but with the Member States. The Member States concerned had to implement the reforms to their banking systems and promote more competitive economic structures. Other Member States could support this through the European coordination procedure and on the basis of the EFSF and ESM bailout mechanisms.
Should the sovereign debt crisis once again threaten to escalate, the Member States had to decide ultimately if they would want to meet the crisis with further financial assistance or a fundamental deepening of European integration, for example in the form of joint liability or a common financial and economic policy.
"In my personal opinion, however", he concluded, "such fundamental changes, regardless of how useful they are, would need to be sufficiently legitimised".
"I think it would be problematic if monetary policy were to anticipate such decisions by effectively communitarising extensive government solvency risks via the central bank balance sheets. Our common currency, the euro, is worth defending and being kept a stable currency. For me, this includes an open exchange about the risks and side effects of our measures of crisis response. I think this is our duty as central banks to the citizens not only of Germany, but also in all the countries of the euro area."
Full address (in German)
Bundesbank Letter to German Constitutional Court - English Translation, 21.12.12 © Ante Hoc
© Deutsche Bundesbank
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