Bundesbank chief urges Greece to stay the course

“It is the responsibility of each member state to ensure the smooth functioning of the monetary union through sound fiscal and economic policies,” Bundesbank President Jens Weidmann told Kathimerini in an interview.

Weidmann, also a European Central Bank Governing Council member, spoke in favor of the bail-in regime as an indispensable element of the banking union, while defending German surpluses and stressing the importance of an innovate, export-oriented economy for Greece to get back on the track of healthy growth.

Why did you vote against the recent reduction in the ECB’s basic interest rate? Isn’t inflation way below the ECB target? Do you really see a medium-term danger of runaway inflation?

Without wishing to comment on my own and colleagues’ individual voting behavior, I can say that when we discussed key interest rates in November the debate was more about when to act rather than whether an expansionary policy stance was appropriate. A minority wanted to see first what impact the strong and unexpectedly sharp decline in the HICP [Harmonized Index of Consumer Prices] inflation rate in October would have on the inflation outlook for the coming two years. After all, monetary policy decisions have to be geared to the outlook for inflation, because it is only future inflation that we can influence. Notwithstanding our expectations that the inflation rate in the euro area will remain low for a protracted period, the risk of deflation is also very low. Longer-term inflation expectations continue to be well anchored at a level consistent with our definition of price stability. But we should bear in mind that extremely low interest rates for a longer period of time are associated with risks and side effects.

In a recent speech at Harvard, you argued that “by piling more and more stabilization tasks on to monetary policy, stability will prove ever more elusive.” Even if one accepts that argument, is it not the case that, in the short run, only the ECB had the right perspective and sufficient firepower to keep the euro from fragmenting?

The printing press is certainly a powerful tool. But the EU Treaties constrain the Eurosystem in using that firepower – and for good economic reasons. Only a central bank that sticks to its restricted mandate will be able to maintain its independence, which is a prerequisite to deliver on our objective of price stability. What is more, monetary policy cannot solve the crisis; at best it will buy time. The ESM was set up for precisely this purpose. Hence, policymakers have the instruments at hand to keep the euro from disintegrating. In the end, it is the responsibility of each member state to ensure the smooth functioning of the monetary union through sound fiscal and economic policies. The Eurosystem cannot compensate for lack of action in these policy areas.

Why are you skeptical about the ECB’s ability to handle both monetary policy and banking supervision? Can it not be argued they are complementary in important ways?

An appropriately designed banking union is indeed an important complement to monetary union. Also, both functions benefit from an exchange of information. But regarding decision making, in my view, the common banking supervision should have been fully separated from monetary policy because of potential conflicts of interest.

Aren’t the dangers that you point out regarding the ECB as lender of last resort to sovereigns mitigated by the terms for bond buying under OMT [Outright Monetary Transactions] as set up by the Bank?

I am aware of no colleague in the Governing Council who pleads for the Eurosystem to become a lender of last resort for sovereigns. This is explicitly prohibited by the EU Treaties. You are right, however, the conditionality of the OMT program is designed to avoid falling prisoner to politics. But it may turn out to be time-inconsistent and thus not credible. Specifically, the ECB might find itself in a quandary: If a sovereign does not comply with conditionality, sticking to it might create financial market turbulence that the OMT was created to avoid.

You have complained that euro politicians have often used the ECB as a safety valve against their own inertia. Do you believe the euro project can survive in the long run without some form of a federal fiscal policy?

Control and liability have to be aligned for any system to produce responsible decisions. With regard to monetary union, this implies that in principle two options are possible. Either we stick to the current Maastricht framework with essentially national policy decisions – but this national responsibility precludes mutualizing sovereign liabilities – or we establish a fiscal union where joint liability is matched with joint decision-making. But in this setting member states would have to relinquish substantial sovereignty to the European level, necessitating changes to the EU Treaties and national constitutions. At the current juncture, I don’t see the public and political support needed for such a far-reaching step.

Regarding the bail-in regime and banking union: In this still-turbulent period, does it not further increase pressures on southern banks and maintain borrowing costs for southern SMEs at forbidding levels?

Before the crisis, investors and banks did not properly take into account the underlying risks of their investment decisions. The taxpayer subsequently had to foot the bill for the ailing banks. This is one of the root causes behind the pressing problems of public finances in many countries of the euro area. The bail-in regime is therefore a key lesson learned from the crisis and an indispensable element of the banking union.

It will contribute to a more stable financial system, thereby fostering lending to the real sector, not least to SMEs [small and medium-sized enterprises]. Moreover, there will be time for banks to adjust to the new regime.

You advocate that the government bond portfolios of banks should be adequately risk-weighted. Why? What would the effect of this be on a country like Greece?

The crisis has thoroughly refuted the assumption that sovereign debt is basically risk-free. Banks have been vulnerable to changes in their sovereigns’ solvency because they have been heavily exposed to them. The doom loop between sovereigns and banks has to be severed. This will, however, only be achieved if the banking union is complemented by an appropriate regulatory treatment of sovereign exposure. Once this nexus is broken, the risks for public finances from having to save failing banks will decline, and this will have a dampening effect on sovereign funding costs. That said, banks should obviously be granted a transitional period to gradually phase in the new regime.

In your judgment, can Greece return to healthy growth, cut unemployment levels and bring its debt onto a sustainable path in the years to come given the extremely tight fiscal policy it is committed to implementing?

I am fully aware that Greece is undergoing fundamental changes with enormous hardship for its people. But the policy course embarked upon is already producing signs of a redressment of the macroeconomic situation. In public finances, a primary surplus is in sight and the current account deficit has been significantly reduced. These first successes should be taken as encouragement to stay the course in economic and fiscal policies given that not all of the agreed adjustment measures have been implemented yet.

Under the current circumstances, I would expect external demand to be the main source of growth in Greece. The structural reforms already enacted and those to which the country is still committed to implement under the adjustment programs will support this process, as will a continuation of the wage and price moderation observed in recent years. Innovation and a higher degree of integration within international value chains will, more than before, be needed for growth. In this context, attracting foreign investment to modernize and increase supply capacities is crucial.

How do you judge the criticism of German economic policy, expressed among others by the US government, according to which German surpluses are a “weight on the world”?

At 7 percent of GDP, the German current account surplus is certainly very high. However, the overall figure masks significant shifts in recent years. The current account surplus vis-a-vis the other euro-area countries almost halved between 2009 and 2012 as a result of the adjustment processes in the euro area. Conversely, the surplus vis-a-vis the rest of the world has increased. However, this outcome is a market-driven result of individual savings and investment decisions. Given the value chains in German manufacturing, the rest of Europe benefits from strong German exports to, say, China or the US. Hence, artificially lowering Germany’s competitiveness would be a self-defeating strategy. Furthermore, spillover effects on Southern European countries from additional fiscal spending in Germany are overestimated. And, keep in mind, sound public finances in Germany are also important for the credibility of the European rescue mechanisms.

Are you worried the national minimum wage agreed by the new coalition in Germany will have adverse effects on employment?

According to the coalition agreement, a general minimum wage of 8.50 euros per hour is to be imposed. Currently, a sixth of German employees receive an hourly wage of less than 8.50 euros, in east Germany it is even more than a quarter. In the service sector the share is particularly high. Given these figures, it is to be expected that the new uniform minimum wage will affect employment, or at least employment dynamics. If that happens, the minimum wage, which is intended to improve the situation of those workers in the low-wage segment of the labor market, will have the opposite effect. This is a concern I have already voiced publicly in Germany.