The European Central Bank has moved towards a “quantitative easing philosophy” but should not automatically use its remaining policy tools right away, Governing Council member Jens Weidmann said.
The ECB has cut interest rates to record lows and launched a fresh stimulus package worth billions of euros but it has so far stopped short of embarking on a U.S-style quantitative easing plan to print money and buy large amounts of sovereign debt.
Weidmann, who is president of Germany’s Bundesbank, expressed concern that the ECB’s target to spend billions on private sector assets could see it overpay for them and transfer risks from banks to the ECB – and ultimately to taxpayers.
ECB President Mario Draghi has said he wants to increase the central bank’s balance sheet the towards levels it hit in early 2012 – up to 1 trillion euros above today’s levels – with a new funding scheme and the private sector asset purchases.
“With the recent decisions, the ECB’s monetary policy approach has changed from programs specifically aimed at credit easing towards a quantitative easing philosophy,” Weidmann told the Wall Street Journal in an interview released on Tuesday.
“But it is risky to believe that monetary policy is the only game in town,” he added. “Monetary policy cannot solve the structural problems in the euro area and financial stability risks may rise the longer the loose monetary policy lasts.”
Draghi said last week that in addition to buying private sector assets, ECB Governing Council members were unanimous in their commitment to using other unconventional policy measures if needed to stave off the threat of deflation.
But Weidmann said this statement «is not meant to imply a willingness to immediately fire whatever weapon happens to be in the arsenal.”
The Bundesbank, like all other central banks in the 18-country euro zone, carries one vote on the ECB Council and cannot singlehandedly block the ECB from pursuing schemes such as its new plan to buy covered bonds and rebundled debt.
Weidmann is nonetheless very influential. As president of the national central bank in Germany, the bloc’s biggest economy and its paymaster, he can try to delineate the debate at the ECB and change its policy course over the longer term.
Weidmann defended the independence of the ECB, which has faced calls from France to support the economy by weakening the euro. “There is a risk of monetary policy, especially in the euro area, being held hostage by politics,” he said.
“The hopes held by some that an exchange rate depreciation will sustainably restore some euro zone countries’ competitiveness are unrealistic,” he added.
Weidmann also appeared to oppose a call Draghi made in a speech in late August for fiscal policy to ‘play a greater role alongside monetary policy’. Many observers saw that as a veiled appeal to Germany to spend more to help the euro zone economy.
“From a European perspective, deficit spending in Germany would probably not deliver the intended benefits because of limited spill-overs,” Weidmann said. “China would be more likely to benefit than Greece.” [Reuters]