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Weidmann said monetary policy alone could not return the economy to full health without more government action on everything from fiscal policy to labour mobility. He told the Financial Times on Friday: "Heterogeneity is an issue in the eurozone. [Central bankers] have only one tool which is a common tool of everybody. It’s the responsibility of other policy makers to contribute to convergence."
At this week’s summit, EU leaders are due to discuss a German-backed proposal for "contractual arrangements" with Brussels that would bind all eurozone countries into bailout-style economic reform programmes. The plan is being resisted by a Paris-led group of mostly southern EU members, who are refusing to agree to the plan unless it includes financial incentives to those who sign the contracts.
According to a draft of the summit communiqué, the contracts would cover almost all national economic decision-making, including “performance of labour and product markets, the efficiency of the public sector, as well as research and innovation, education and vocational training”. The communiqué is less concrete on the financial incentives demanded by Paris, known as “solidarity mechanisms”, calling for Brussels only to “explore all options” as to whether they should be loans, grants or guarantees and how big such financial assistance could be.
The European Central Bank (ECB) has long demanded that its efforts to tamp down the eurozone crisis be accompanied by commensurate efforts from national politicians to overhaul their economies.
Mr Weidmann said rates were too low for the bloc’s economic powerhouse but he saw this as a natural consequence of the relative strength of the German economy and slack elsewhere. The position of the Bundesbank could become particularly tricky if, for example, low interest rates added to a housing bubble and forced the central bank to take "macro-prudential" measures, such as limits on mortgage lending to control the market.
Mr Weidmann emphasised that while German public opinion was concerned about the ECB’s low interest rates, it remained supportive of EU integration. He said that before the founding of the ECB, the Bundesbank had set one interest rate for Germany, even when economic conditions varied between German regions. "To some extent you have to live with this, but other policy makers have to react. Monetary policy isn’t a substitute for government action."
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