Weidmann Says 2013 Could Be Year of Decisive Steps to End CrisisJeff Black
Bundesbank President Jens Weidmann said policy makers should take decisive action this year to put an end to Europe’s debt crisis.
“2013 certainly won’t mark the end of the crisis,” Weidmann, who also sits on the European Central Bank’s Governing Council, said in a speech in Frankfurt today. “The adjustment processes take a while. But 2013 could be a year in which decisive steps are taken to permanently overcome the crisis.”
Tensions on financial markets have eased since the ECB announced a new bond-purchase program, prompting European leaders to begin asserting that the worst of the turmoil that started in Greece three years ago has passed. Progress on the so-called banking union, which will install the ECB as supervisor over the region’s banks, will occupy officials from the European Union’s 27 member states for much of this year.
“Much remains open, particularly what the end point is supposed to look like,” Weidmann said. “National interests are still clearly defined, while the goal of a functioning and stable currency union sometimes slips out of view.”
The banking union should be the basis for the future stability of Europe’s financial system and not a tool for sharing the bad debts that arose in the current crisis, Weidmann said.
European finance ministers gathering in Brussels today will likely clash on whether the 500 billion-euro ($665 billion) European Stability Mechanism can take over bad loans already made by banks in countries such as Spain or Ireland.
Banking union “cannot solve the current crisis, and it should not clean up its bad debts,” Weidmann said. “Rather, it should make the European financial system and with it the currency union more robust against undesirable developments and new crises.”
While political agreements on banking union last year were positive steps, progress must be maintained, Weidmann said. “These advances are more like stage victories rather than the end of the race,” he said.
Central banks around the world may have had to pay for the current state of calm in financial markets with a loss of independence, Weidmann said, as governments lean on institutions to save financial systems, stimulate economies and lower borrowing costs.
Quoting ECB President Mario Draghi, with whom he has quarrelled over the bond-buying program, Weidmann said central banks can best protect their independence when they keep to a narrow definition of their inflation-fighting mandates.
Weidmann was the only ECB policy maker to vote against Draghi’s plan, announced in September, that pledges unlimited bond purchases by the central bank for countries that sign up to economic reform programs. Draghi has credited the program, which has yet to be used, with removing doubts about the continued existence of the euro.
“The overloading of central banks with tasks and expectations is surely not the right way to sustainably overcome the crisis,” Weidmann said.
The Bundesbank president signaled that Germany’s economy, Europe’s largest, should recover from a probable fourth-quarter contraction and suffer only a “dent” in growth.
“There is justification for saying that the weak phase won’t last too long,” he said.
The Bundesbank said in its monthly report today that there are signs that the recovery is already taking place. The Frankfurt-based central bank predicts 0.4 percent economic growth this year and 1.9 percent in 2014.
“All in all, one can say that the outlook, while modest, isn’t too bad given all the uncertainty” caused by the crisis, Weidmann said.
Despite the temporary improvement, Weidmann warned about declaring the debt crisis, and the resulting economic weakness, as over.
“Crisis-weariness narrows the view to the short-term calming of the situation,” he said. “But we all know from our own experience, problems are persistent as long as their causes aren’t addressed.”