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ECB’s Weidmann Says Rescue Fund Expansion Won’t Solve Crisis

European Central Bank  Governing Council member Jens Weidmann
European Central Bank Governing Council member Jens Weidmann speaks during the "Rebalancing Europe" event at Chatham House in London. Photographer: Chris Ratcliffe/Bloomberg

European Central Bank Governing Council member Jens Weidmann said boosting Europe’s rescue funds will not solve its debt crisis, days before finance ministers meet to discuss expanding the limit on bailout lending.

“Just like the ‘Tower of Babel,’ the ‘Wall of Money’ will never reach heaven,” Weidmann said in a speech at Chatham House in London today. “If we continue to make it higher and higher, we will, in fact, run into more worldly constraints,” which might include setting “incentives that lead to new problems in the future.”

Euro-area finance ministers are likely to bolster Europe’s crisis funds to between 700 billion euros ($934 billion) and 940 billion euros at a meeting in Copenhagen on March 30. German Chancellor Angela Merkel this week gave her first indication that she is prepared to allow an increase in the firewall as Portugal and Spain show “fragility.”

“All the money we put on the table will not buy us a lasting solution to the crisis,” Weidmann said, citing Bank of England Governor Mervyn King’s view on the matter that it merely buys time.

Weidmann, who used to work as Merkel’s economic adviser before taking the helm at the Bundesbank, said countries with deficits in their budgets and current accounts must seek to address those imbalances. Countries with surpluses shouldn’t be called upon to make themselves less competitive, he said.

ECB Role

He said the risks that fiscal austerity will prevent countries returning to growth are “being exaggerated,” and “in any case, there is little alternative.”

Weidmann rejected any calls for the ECB to “temporarily ease the pressure” and do more to support the euro-area economy.

The central bank’s two three-year cash injections, loaning banks a combined 1 trillion euros, have temporarily calmed markets. While it’s “unavoidable” that central banks have to act more flexibly in times of crisis, “once a central bank becomes involved in fiscal policy, it eventually loses its independence and its credibility as an inflation-fighter,” he said.

ECB policy makers have signaled they’re reluctant to add to stimulus measures and started to talk about their eventual withdrawal.

Low Rates

Still, the Organization for Economic Cooperation and Development called yesterday on the ECB to deploy more emergency measures and commit to keeping rates low “if the crisis were to intensify.”

The ECB has shouldered the main crisis-fighting burden by flooding the banking system with liquidity, buying government bonds in the secondary market and cutting the key rate to a record low of 1 percent.

Weidmann said the ECB had already “undertaken tremendous efforts” and said the reason the central bank’s founding treaty “explicitly prohibits monetizing public debt” is to avoid a situation where “governments have an incentive to accummulate debt.”

“If central banks went down this route, they would be redistributing fiscal risks and costs among the taxpayers of the euro area,” he said. That would have “a highly corrosive effect on the credibility of central banks and on their independence,” Weidmann said.

He also said he expects inflation in Germany, Europe’s largest economy, to accelerate “as we will see more heterogenity in the years ahead.”

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