10 July 2012

Bundesbank/Weidmann: “We need clarity regarding the structure of European monetary union”

On 10 July 2012, the Federal Constitutional Court discussed several emergency motions filed against the Acts endorsing the European Stability Mechanism (ESM) and the fiscal compact. Bundesbank President Jens Weidmann gave the court his assessment of the possible consequences if the constitutional judges were to uphold the motions seeking a temporary injunction.

President Weidmann began by emphasising that the impact assessments had to be based on a large number of assumptions, especially in the current environment, and were therefore highly speculative. One crucial factor, he said, was how the financial markets would interpret such a decision. In addition, he stressed that subsequent developments in the individual countries would have to be considered, which were difficult to predict with any degree of precision.

Weidmann explained that the financial markets' immediate response to a temporary injunction would depend on how long the delay was expected to last and whether the decision was regarded as a precedent for the substance of the case. “We can also assume that the markets have already partly priced in a delay in the ESM’s launch”, he said.

Taking the funds already pledged for Greece, Ireland and Portugal into account, the European Financial Stability Facility (EFSF) still had enough free lending capacity to cover the announced funding needs of Spain and Cyprus even if the ESM treaty entered into force with a delay, he said.

However, Weidmann emphasised, it was not out of the question that bad news in the coming weeks on the state of individual government budgets, banking sectors or, in particular, on the upcoming programme reviews would trigger a renewed increase in uncertainty on the financial markets and, consequently, a further intensification of the crisis. In such a scenario, doubts over the adequacy of available funds could increase the sense of uncertainty further, he said. A delay in the ratification of the ESM could then cause another rise in central banks’ balance sheet risks.

“On the other hand, quickly ratifying the ESM treaty and the fiscal compact provides no guarantee that the crisis will not intensify any further”, said President Weidmann. “The funding provided via the ESM can buy time for the necessary adjustment processes, but it cannot replace them.” It was therefore crucial to tackle the root causes, Weidmann warned.  “We urgently need clarity regarding the future institutional framework for monetary union”, he stressed.

Given the possible threat of contagion, the Bundesbank had considered the rescue packages to be justifiable under the proviso that strict conditionality would be imposed, Weidmann said. “Yet financial assistance must remain a last resort. This is the only way for the rescue packages to resolve the inconsistency between the national responsibility that lies at the heart of the Maastricht treaties and financial assistance”, he emphasised.

President Weidmann said that the fiscal compact was also making a meaningful contribution to strengthening the existing regulatory framework but that the leeway allowed in the specific transposition of the budgetary rules into national law and their application over time was very large.

The ESM and the fiscal compact therefore did not, per se, provide the necessary clarity regarding the future institutional framework for monetary union, Weidmann said.

Press release

© Deutsche Bundesbank