Weidmann Says ECB Should Resist Pressure to Use ‘Nuclear Option’ in Crisis
European Central Bank Governing Council member Jens Weidmann said policy makers should resist pressure to increase government bond purchases in response to the euro region’s debt crisis.
Some are demanding that the ECB turn to the “bazooka” or “nuclear option” of “engaging in unlimited government bond purchases and limiting yields,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Ludwigsburg late yesterday. “There are a number of legal, economic and political reasons why we shouldn’t do this,” he said. Such an approach would violate European Union law, take away the incentive for governments to implement fiscal reforms and redistribute losses within the currency union, Weidmann said.
While the ECB has bought 217 billion euros ($279 billion) of bonds from distressed member countries since May 2010, President Mario Draghi says the program is temporary, limited and aimed solely at improving the transmission of interest rates on financial markets. It’s wrong to compare the ECB with the U.S. Federal Reserve, Weidmann said.
“The Fed is the central bank of a nation state and not of a monetary union, in which the financing of governments through the printing press is forbidden,” he said. In addition, Fed- style quantitative easing aims to reduce long-term interest rates in a capital market-based financial system and not at cutting refinancing costs for individual states, Weidmann said.
ECB Independence
In the case of the ECB, “monetary policy would definitely cross the division line to fiscal policy with a massive expansion of bond purchases,” Weidmann said. “Central banks that allow themselves to be manipulated by fiscal policy quickly risk the legitimacy of their independence.”
Instead, the ECB has provided banks with unlimited liquidity to keep the banking sector afloat and avoid a credit crunch. Banks last month borrowed a record 489 billion euros from the ECB for three years.
“Naturally, risks resulting from this liquidity provision are increasing,” Weidmann said. “It’s warranted to maintain a balance. Monetary policy mustn’t lose sight of its mandate for stable prices by taking on excessive risks or acting outside its mandate.”
Weidmann said postponing fiscal reforms in countries that are in economic downturns wouldn’t be the right policy response.
“It is undisputed that fiscal consolidation normally has a dampening impact on the economy,” he said. “In a situation of a massive confidence crisis, triggered by an excessive increase of government debt, however, there is no alternative” and “it shouldn’t be ignored that we are observing adjustment recessions in some countries of the euro area.”
Fiscal Compact
Weidmann said a new rulebook for budgetary discipline negotiated at a Dec. 9 summit of EU leaders seeking to create a “fiscal compact” can make a “helpful contribution” to overcoming the crisis. “However, preliminary agreements reaching the public don’t give reason to be hopeful; watering- down tendencies are unmistakable.”
Weidmann also said the fiscal pact doesn’t justify asking the ECB to do more. The central bank “has a very clear mandate, namely guaranteeing price stability, and strict rules for good reasons,” he said.
Standard & Poor’s last week stripped France and Austria of their top credit ratings in a string of downgrades that left Germany with the region’s only stable AAA rating. S&P said governments’ crisis-fighting efforts are falling short of what’s needed.
Credit Ratings
While ratings companies are not to blame for the crisis and only reflect what is happening, it’s advisable “to attach less weight to credit ratings and instead increase incentives for market participants to strengthen their own risk analysis,” Weidmann said.
S&P also stripped the European Financial Stability Facility of its AAA rating.
“The loss of the top rating for the euro rescue fund EFSF in my eyes proves one more time that there are limits to solving the crisis with more and more money,” Weidmann said.
The Bundesbank expects the German economy, Europe’s largest, to stagnate in the first quarter and gross domestic product may have contracted in the final quarter of last year, Weidmann said. Economic momentum should return in the course of 2012 as domestic demand increases, providing the basis for a long and broad-based economic upswing, he added.
The Bundesbank forecasts growth of 0.6 percent this year and 1.8 percent in 2013, Weidmann said.
To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net
To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net
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