Additional debt relief will not help pull Greece out its current crisis, the head of the German central bank or Bundesbank, Jens Weidmann, said on Thursday.
Because the average maturity of Greeces debt “is quite long and the average interest rate quite low — as is the current annual level of debt servicing — further debt relief would not really change Greece’s liquidity situation by much,” Weidmann told a banking congress in London.
A copy of his speech was made available by the Bundesbank in Frankfurt.
Furthermore, “any further relaxation of the agreed targets would be counter-productive to efforts to regain investors’ confidence in Greece’s debt sustainability. And that would come at the expense of tax-payers in other euro-area countries,” Weidmann warned.
“Additionally, it would also be to the detriment of other euro-area countries’ governments: it would be much harder for them to justify the rocky path of economic reform,” the Bundesbank chief said.
The new government in Greece, headed by Prime Minister Alexis Tsipras, is trying to persuade other European Union leaders to back an austerity-lite replacement plan for the country’s 240-billion-euro ($270-billion) EU-IMF bailout, which expires at the end of February.
Athens has drawn up a 10-point proposal under which Greece would stick to 70 percent of its bailout reform commitments but overhaul the remaining 30 percent. Greece also wants a debt swap that will free up funds for economic growth.
Weidmann, who as head of Germany’s central bank sits on the European Central Bank’s policy-setting governing council, said he believed it was “in Greeces own interest to do what is necessary to tackle the structural and fiscal problems it is facing.”
Greece would “continue to need support, but support can only be given if the agreements made are complied with,” he insisted.
Turning to the ECB’s recent controversial decision to buy more than 1 trillion euros ($1.13 trillion) in sovereign bonds as a way of boosting inflation in the euro area, Weidmann reiterated his skepticism that such a program, known as quantitative easing or QE, was either effective or necessary.
“In my view there was no immediate need for this particular measure,” Weidmann said.
While QE has already been used by the Bank of England and the US Federal Reserve to jump-start their economies, the ECB has long wrangled over whether to follow suit, in part due to strong opposition to the measure in Germany.
Germany sees QE merely as sticking a plaster on weaker economies like Italy and Spain which, it argues, need instead to push through structural reforms to make them more competitive.
Germany is also concerned that, as Europe’s biggest economy and its effective paymaster, it will have to pick up the tab should another country default on its debt “What we are currently seeing is a disinflationary process, not a deflationary spiral of decreasing prices and wages. The risk of self-reinforcing deflation is still considered to be very low,” Weidmann said.
The currently low level of inflation was largely due to falling energy prices.
And that “works more like an economic stimulus for the euro area than a harbinger of imminent deflation,” the Bundesbank chief argued.
Furthermore, “structural problems cannot be resolved by printing money,” he argued.
The ECB “has played a significant role in preventing an escalation of the crisis. However, central bank action cannot replace the necessary adjustment processes. In this regard, I appreciate assurances by European leaders to the effect that QE must not substitute structural reforms,” Weidmann said.