Bundesbank President Jens Weidmann said Europe’s current framework for bailing out distressed nations will eventually weaken even the single currency’s strongest members unless it is changed.
“If things stay the way they are, the consequences of unsound policies will be too easily passed on to others,” Weidmann said in Berlin late yesterday. “Sooner or later the economically solid countries will be weakened. Liability and control have to be brought into balance.”
Germany, Europe’s largest economy, has pledged more than 300 billion euros ($407 billion) in loans and guarantees to help shore up the finances of euro member states such as Greece, Ireland and Portugal. Weidmann, who’s also a member of the European Central Bank’s Governing Council, has argued that policies including the OMT bond-purchase program come too close to the banned practice of financing states by printing money.
Risks that have been shared via bailouts and ECB emergency measures have already reached a “substantial level,” Weidmann said. “If these risks rise, the culture of stability could be eroded as if we had explicit joint liability.”
Germany shouldn’t allow wages to rise too quickly in order to rebalance competitiveness within the euro area, Weidmann said. An increase in wages of even 5 percent would have no impact on the output of crisis-ridden countries, and would instead damage Germany.
“The crisis countries would only become more competitive in relation to Germany, but not against countries outside the single currency,” Weidmann said. “At the end of the day, the whole euro area would be worse off.”
Rather, countries should concentrate on improving their own competitiveness and undertaking economic reforms to secure growth, Weidmann said.
“That requires discipline in cleaning up government finances,” he said. “The necessary process of reform and adjustment is difficult, and not free from setbacks. Bailouts can accompany that and soften the blow, but they cannot replace it.”
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