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Interview with Dr Jens Weidmann, President of the Deutsche Bundesbank, in Corriere della Sera (IT), Público (PT), Kathimerini (EL) and El País (ES).
We are dealing with a crisis of confidence, and lost confidence cannot be regained overnight. Confidence has also been lost in the functioning of monetary union as a whole. This brings us back to the debate about whether we want to return to the Maastricht framework, which relies on national fiscal policies that are responsible only for themselves, or whether we want to take a quantum leap forward, regarding integration. We cannot say that, on the one hand, we rely on national fiscal policies and on the other hand, we progressively communitise risk without control, thereby undermining the existing legal framework. In the end, it's always a question of the balance between common liability and control.
You're saying that, if there is control, we can have eurobonds?
I'm saying that common liabilities are only compatible with a completely different framework, and this framework would have to be proven to ensure fiscal discipline and sound macro-economic fundamentals. You can’t take the third step before the first.
But who controls? Is the fiscal compact enough?
Of course, it's not enough. The Bundesbank welcomed the fiscal compact because it strengthens existing rules. But it is not tantamount to abandoning sovereignty. For me, a fiscal union is something where you cut into the budgetary rights of parliaments, at least if rules are violated. And we see how difficult it is to abandon fiscal autonomy: even under enormous pressure it is very hard, for instance for Spain, to subject itself to conditionality. It’s perceived as a matter of national pride.
What do you mean exactly by common liabilities?
We already have common liabilities through the rescue mechanism. If you wanted to extend it – be it via eurobonds, be it via a banking union – this would mutualise liabilities to an extent that is no longer covered by the EU treaties and national constitutions. When we really want to advance towards a political union, we have to acknowledge that this is a completely new setting and that means that we would all have to give up substantial national sovereignty. It means that you have a central level that can interfere directly with your budget, your taxes, to enforce the agreements. We have to honestly ask ourselves: are we ready to give up that much national sovereignty?
Would the Germans accept this?
At least according to the polls, the public in Germany would be more willing to embark on more political integration than in most of the other countries. The latest Pew research poll shows that in Germany, 58 per cent are in favour of more political integration. In other countries, the mood is more negative, especially in those that are asking most loudly for communitisation of risks and liabilities, like Italy, Spain or France. We have to be honest in this debate. It will take years and years. We would have to change the EU treaties, we would have to change our constitutions, even in the sense of having a referendum, for instance in the case of Germany.
Would they rather go back to the D-Mark?
No, the German public is clearly committed to a stable common currency.
But in the periphery the house is burning. And some are asking what is the ECB doing? Why can't it be a lender of last resort?
The ECB has already gone a long way towards preventing an escalation of the situation. It has cut interest rates. It continues to provide almost unlimited liquidity at very generous terms and decided several non-standard measures. By doing so, it has stretched its mandate considerably. If it acted as a lender of last resort to governments this would redistribute solvency risks among national taxpayers, for which there is no democratic legitimacy, and is hence strictly forbidden in the EU treaties.
What could Germany do to help rebalance the euro area?
A rebalancing is already taking place: the current account surplus has halved from 2007 to 2011, and what we are seeing now is to some extent a reversal of the pre-crisis situation. In the first decade of monetary union, Germany embarked on structural reforms and wage moderation. Now in Germany we have above-average growth rates, employment is the highest we’ve ever seen, and effective wages are increasing faster than in the past 20 years. This will translate into purchasing power and help rebalance the current account. But we are not living on an island. Our main competitors - like the US and China or other emerging economies - are outside the euro area, so that it is very important that Europe as a whole becomes more competitive.
Apart from the political union there is a banking union which is waiting to be discussed at the end of June. What do you think of the three points: a paneuropean supervision, a deposit guarantee fund and a banking restructuring fund? The Commission has put forward a proposal, are you satisfied with this proposal?
I welcome the bank resolution proposal of the Commission which still needs a lot of debate, because it is very technical and very complicated. But over and above that, there are the issues of common regulation and common supervision; and there are two elements which imply common liabilities: a common deposit insurance scheme and a common restructuring fund. These are areas in which we currently have a national fiscal responsibility. If we were to mutualise liabilities in these areas, we would face the same questions regarding liability and control as in a fiscal union.
But not for now?
There is the question of balance between control and liability. And the liability side, when it comes to figures, is impressive: if you think about insuring the deposits, those numbers are well beyond what we decided for the European rescue mechanisms. This is really a big step and that’s why we have to have centralised control and then we can talk about the liabilities. I don’t think you can really separate the banking union from the rest, especially as long as the banks are the biggest holders of government debt. We have to make sure that through a banking union we don't introduce through the back door a sort of eurobond system, guaranteeing the banks and in this way funding governments. So you need strong rules to prevent this. Another related question is would supervision really be better if it were centralised?
But also central bankers say that there is a need to break the vicious circle between the sovereign and the banks. And one way to do it is to have a common supervision, because, e.g., the supervision in Spain didn’t discover the risks of €100 billions in the banks.
I agree, the nexus between the sovereign and the banks could be broken by a banking union. But again, this is not a quick fix, as it requires similar legal changes to a fiscal union, because you take on a considerable amount of common liabilities. And this would interfere greatly with the national sovereignty and the rights of national parliaments. That's why it requires fundamental change and won't come overnight. Nobody would guarantee €11 trillion of deposits without having the insurance that at the end there is control.
What about using the gold reserves of each central bank to guarantee the deposits?
Our gold reserves are currency reserves. They are independently managed by the Bundesbank and the other Eurosystem central banks. And as far as the Bundesbank is concerned, we have absolutely no intention of contributing to an insurance scheme. Moreover, this is not possible for legal reasons.
But we need a common guarantee for bank deposits.
I see no way to do this now. Eventually, each parliament would have to assume liability for deposits in all of Europe. If some of these risks materialise, this would jeopardise the possibility of national parliaments to control their budget. If you don't have safeguards that the risks are under control, this would be a reckless undertaking.
See also Everything flows? The future role of monetary policy, 14.6.12