UPDATE 1-Weidmann-ECB risks losing trust over crisis response

Thu Sep 1, 2011 8:37am EDT

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(Adds Stark, background)

* Weidmann sees lines blurred between monetary, fiscal policy

* Says blurring of lines strains confidence in cenbanks

* Says up to govts to decide on taking further risks

* Stark says no alternative to consolidate public finances

By Marc Jones and Michael Shields

FRANKFURT/ALPBACH, Austria, Sept. 1 (Reuters) - Bundesbank chief Jens Weidmann said on Thursday trust in the European Central Bank could be lost if it persists with crisis-fighting policies that go beyond its core role, making a thinly veiled attack on its bond-buy plan.

His latest remarks highlight the resistance from the Bundesbank, and a minority of other ECB policymakers, to the revival of the plan which has raised questions about the extent of the ECB's commitment to pursue it.

Weidmann said the lines between monetary and fiscal policy had been blurred as a result of the financial and euro zone debt crises.

"In the long run this strains the trust in the central banks, and therefore for monetary policy it matters that the additional risks that have been taken on reduced again," he said in the text of a speech for delivery in Hanover.

Weidmann, who has steadily ratcheted up his public opposition to the ECB's flirtation with the fiscal arena since he took the Bundesbank's helm in May, also said the sovereign debt crisis was the biggest test the euro had faced.

The ECB reactivated the bond-buy plan last month after a 19-week pause in an effort to halt contagion of the euro zone debt crisis to Italy and Spain.

The programme's conception in May last year led to the resignation of Weidmann's predecessor, Axel Weber. As Europe's largest economy, Germany foots more than a quarter of the bill for euro zone bailouts.

The ECB's bond-buy plan has succeeded in bringing 10-year Italian and Spanish government bond yields down to around 5.0 percent, from danger levels above 6.0 percent before the central bank stepped in.

But the ECB cut its bond purchases last week more sharply than expected, to 6.651 billion euros, further scaling back its intervention after its renewed foray into debt markets helped stabilise Italian and Spanish yields.

ECB SPLIT

The opposition of Weidmann and Juergen Stark, another German ECB policymaker, and two other members of the ECB's 23-member Governing Council to the revival of the plan means there is uncertainty about the extent of the ECB's commitment to pursue it.

The hawks think the bond-buying risks fuelling inflation, encouraging irresponsible spending by governments and compromising conservative monetary principles.

They are also concerned that the purchases push the ECB into the fiscal policy arena, overstepping its mandate and threatening its independence.

Weidmann and Stark both urged euro zone countries on Thursday to tackle consolidate their public finances -- comments that showed they want governments rather than the ECB to lead the fiscal policy response to the crisis.

"Decisions over whether to take on further additional risks would have to be made by governments and parliaments; only they are legitimised democratically to do so," said Weidmann.

By pushing governments to tackle the crisis, he struck a similar to tone Federal Reserve Chairman Ben Bernanke, who said last Friday the onus for boosting long-term growth prospects in the United States was with the White House and Congress.

Germany has resisted hefty bailouts to help more profligate euro zone states and Chancellor Angela Merkel is facing an uphill battle to convince sceptics in her party to back efforts to contain the crisis.

Noting that the debt problems of weaker euro zone countries had been shared by the bloc's stronger states, Weidmann said this was not the way to maintain incentives for solid fiscal policy.

"Such a solution is not suitable to curtail the uncertainty on financial markets. Moveover, it exposes monetary policy to pressure to have a loose bias," he added.

Stark, speaking in Alpbach in Austria, said: "There is no alternative than to consolidate." (Created by Paul Carrel; Editing by Anna Willard)

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