Schaeuble Says Structural Reforms Needed, Not QE

German Finance Minister Wolfgang Schaeuble said economic policy changes and investments are the right way to boost growth in the euro region while relying on further monetary stimulus creates “moral hazard” that must be avoided.

If euro member states have an easier way out of economic difficulties, such as relying on European Central Bank bond purchases, they won’t stick to what they have to do to revamp their economies, Schaeuble said at a panel discussion in Washington before a meeting of finance chiefs during the annual meetings of the International Monetary Fund and World Bank.

“We have to stick to structural reforms,” Schaeuble said. “Monetary policy can only accommodate, it can buy time.”

ECB President Mario Draghi has said he wants to “steer” the central bank’s assets toward early-2012 levels, when they were at more than 3 trillion euros ($3.8 trillion), compared with about 2 trillion euros now. While Draghi stopped short of committing to government bond purchases, his plan includes buying asset-backed bonds such as mortgage securities.

Schaeuble said measures used in the U.S. and U.K. to prop up those economies can’t easily be copied in Europe because the 18-member bloc lacks the centralized decision-making structures that would allow power over national budget-setting.

“In the given structure of the euro zone, since we don’t have a political union, since we don’t have a fiscal and economic union, the moral hazard problem has a much higher importance in Europe than in the U.S.,” Schaeuble said.

France’s Deficit

France, which is barely growing, expects its budget deficit to rise this year for the first time in half a decade and doesn’t see the shortfall shrinking to the European Union limit of 3 percent of gross domestic product before 2017. Italy, in its third recession since 2008, has pushed back its plan to achieve a structural balance to next year from this year.

“As soon as France and Italy implement substantial structural reforms, the situation in Europe will change,” Schaeuble said. “The responsible leaders in France and Italy know very well what must be done but it’s difficult to convince parliament, it’s difficult to convince public opinion.”

While Germany is still the engine of growth in Europe, “this year, we have some weakening,” Schaeuble said, citing global crises such as the Ukraine conflict and the effect of sanctions against Russia. “We don’t have a recession in Germany.”

While Schaeuble said “we all agree” that more priority should be given to investments, he cautioned that economies must be able to absorb these investments. In Spain, a “bubble” of investments in public infrastructure was created, helped by low interest rates, he said.

A proposed investment plan over 300 billion euros, floated by incoming EU Commission President Jean-Claude Juncker, must be scrutinized for “concrete opportunities” to make sure that individual projects make economic sense, Schaeuble said.

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