European Central Bank council member Jens Weidmann said central banks can lose their inflation-fighting credibility when they attempt to compensate for structural weaknesses in the economy.
“The longer a central bank tries to paper over structural growth weaknesses, the less credible it becomes with regards to price stability,” Weidmann, who heads Germany’s Bundesbank, said in a speech in Frankfurt today. “This can lead to higher inflation expectations and eventually to inflation.”
Weidmann was the only Governing Council member to vote against the ECB’s new government bond-purchase program, saying it is tantamount to printing money to finance governments and warning it may fuel inflation. ECB President Mario Draghi announced the plan, dubbed Outright Monetary Transactions, in September. Investors are now waiting for countries like Spain to seek aid from Europe’s rescue fund and sign up to conditions to trigger ECB debt-market interventions.
“Solid public finances remain a necessary prerequisite for stable prices,” Weidmann said. “Therefore, from my point of view, there’s no other way than strong-willed consolidation.”
High government debt may lead to inflation and also harm economic growth, he said.
“If government debt gets out of hand, prices will rise,” Weidmann said. “But even before such a spiral occurs there are dangers for price stability because of rising government debt.”