European Central Bank Governing Council member Jens Weidmann said common euro bonds or joint debt liability could be established in the currency area in the context of a true fiscal union.
“If a framework was credibly established that reliably ensured the adherence to fiscal rules, then a common liability by the euro member states could be introduced,” Weidmann said in a speech today in Mannheim, Germany. “That could for example entail jointly-guaranteed or partially guaranteed government bonds or a banking union.”
European policy makers are debating the future design of a more integrated single currency as a debt crisis that has seen four countries appeal for bailouts highlights its shortcomings. Yields on Spain’s 10-year debt rose to a euro-era record today after Moody’s Investors Service cut the nation’s credit rating to one step above junk, citing its rising debt burden and weakening economy.
Weidmann, who is president of Germany’s Bundesbank, said the euro area is facing a “decision over which direction a stable union should now take.” Two directions are possible, either toward a full fiscal union or back to national sovereignty and self-responsibility. In the latter scenario, common debt responsibility cannot happen, he said.
On monetary policy, Weidmann said that a discussion on whether the ECB should set a higher inflation goal than its current 2 percent, or that it should receive an expanded mandate, would undermine the confidence of the public in the central bank.
Trust in monetary policy “is long and dearly purchased and is at a particular point quickly lost,” he said. “Discussions over the utility of a higher inflation target or a broadened mandate, no matter how fruitless they might be, are poisonous for this trust.”
“Instead, monetary policy has to decisively counter emerging upside risks for inflation,” Weidmann said.