ECB cannot solve euro zone crisis: Bundesbank chief

AIX-EN-PROVENCE, France Sun Jul 7, 2013 8:41am EDT

Germany's federal reserve Bundesbank President Jens Weidmann poses in front of the Bundesbank headquarters during a photo shoot with Reuters in Frankfurt May 17, 2013. REUTERS/Kai Pfaffenbach

Germany's federal reserve Bundesbank President Jens Weidmann poses in front of the Bundesbank headquarters during a photo shoot with Reuters in Frankfurt May 17, 2013.

Credit: Reuters/Kai Pfaffenbach

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AIX-EN-PROVENCE, France (Reuters) - The European Central Bank cannot solve the euro zone crisis, Bundesbank chief Jens Weidmann told economists on Sunday, pressing the bloc's governments to get their economies in shape and tighten their fiscal rules.

Weidmann addressed an economists' conference in Aix-en-Provence, southern France, only three days after the ECB broke with precedent by declaring that it intended to keep interest rates at record lows for an extended period and may yet cut further.

"Monetary policy has already done a lot to absorb the economic consequences of the crisis, but it cannot solve the crisis," Weidmann said in his speech.

"This is the consensus of the Governing Council. The crisis has laid bare structural shortcomings. As such, they require structural solutions."

Weidmann, widely recognized to be the most hawkish member of the ECB's 23-man Governing Council, does not want the bank to intervene too strongly in tackling the bloc's economic crisis, thereby allowing governments to soft-pedal reforms.

He spoke a day after fellow ECB policymakers Christian Noyer and Benoit Coeure said the bank's decision to abandon its customary insistence that it never precommits on policy was a change in communication but meant no change from its strategy, which is based on monitoring inflation, real economy and monetary developments.

"The euro zone is on the mend, it must be at peace, protected, be allowed to heal," Coeure told the same conference on Sunday to explain the ECB's decision to issue such forward guidance, while urging governments to tackle structural problems.

The EU's top economic official, Olli Rehn, welcomed the ECB's move, saying the step - taken in response to turbulence caused by the U.S. Federal Reserve's plan to slow monetary stimulus - was needed to preserve recovery in Europe.

"The United States and Europe are at different points of the economic cycle. While the U.S. has a more restrictive approach, Europe needs to continue with a more accommodative policy," the EU monetary affairs commissioner said.

FISCAL RULES

While he does not see sufficient support in the euro zone for governments to give up sovereignty on fiscal matters to forge a fiscal union to prevent such crises in the future, Weidmann pressed them to stiffen Europe's fiscal rules.

"To fully unleash the common currency's potential, efforts are needed on two fronts: structural reforms as well as the abolition of implicit guarantees for banks and sovereigns (government bonds)," Weidmann said.

"In addition to stronger rules, we need to make sure that in a system of national control and national responsibility, sovereign default is possible without bringing down the financial system. Only then will we really do away with the implicit guarantee for sovereigns."

The Bundesbank chief also called for euro zone governments to sever what he describes as the "excessively close links" between banks and sovereign governments, saying that European banks hold too many of their own governments' bonds.

"This is because banks do not have to hold any capital against their government debt, as the risk-weight assigned to sovereign bonds is zero.

To counteract excessive investment in sovereign bonds, Weidmann believes that the capital rules need to be changed to take account of risk and exposure levels.

"Only then will banks be able to cope with the repercussions of sovereign default."

(Writing by Paul Carrel; Editing by Alison Williams)

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Comments (3)
reality-again wrote:
Precisely.
The idea that a central bank can solve the economic problems of a single country or an economic bloc is naive it best.
A central bank engaged in extreme policies is irresponsible, especially if such policies are enacted over a long period and lack well-tested and commonly agreed means of being evaluated.
This is true for the EU, US and Japan.

Jul 07, 2013 9:01am EDT  --  Report as abuse
JohnWayne2 wrote:
Re-engineer the financial ties among banks within the Eurozone to allow sovereign default without causing losses outside the country that is allowed to default? Why make this complicated? Keep it simple: Quit the euro and go back to separate currencies.

Jul 07, 2013 11:12am EDT  --  Report as abuse
nixonfan wrote:
Olli Rehn:
“The United States and Europe are at different points of the economic cycle. While the U.S. has a more restrictive approach, Europe needs to continue with a more accommodative policy.” Does he truly believe that the EZ’s low money growth, low nominal growth and negative real growth represent an accommodative monetary policy? Remember, the ECB has full control of the EZ’s nominal growth rate, which is now approaching zero.

Jul 07, 2013 3:02pm EDT  --  Report as abuse
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