JOUY-EN-JOSAS, France (Reuters) - The European Central Bank should move back toward traditional monetary policy and away from its current path which is too close to fiscal policy, ECB Governing Council member Jens Weidmann said on Monday.
Weidmann also said that France, where he was speaking, must meet budget deficit targets it has signed up for, and that it is especially important for it to show an example to smaller euro countries.
Talking generally about efforts to solve the euro zone debt crisis, Weidmann repeated his stance that central banks could not solve the crisis if they wanted to, and that they should not be pushed to take a role in fiscal policy.
Putting the onus on governments to act, he said monetary policy or exchange rate policy cannot be the solution to the debt crisis.
“Central banks must focus on price stability, must remain independent, and must not become too closely intertwined with fiscal policy,” he said in the text of a speech to be given at HEC business school.
He cited the Bank of Japan as a central bank under political pressure, but also warned that the expectations of central banks saving the day had become so large in the euro zone that it was time to worry about inflation eroding buying power.
French President Francois Hollande called earlier this month for the euro zone to set a medium-term target for the euro, receiving a frosty response from Berlin as well as the ECB.
Weidmann said overactive central banks are a bigger problem, which could erode the common currency.
“If we care about stable prices and if we care about purchasing power then we should be worried,” Weidmann said.
“We should be worried because on the European dance floor monetary and fiscal policy are moving toward each other.”
Such flirtation could only end badly, the German anti-inflation hawk warned.
“If you dance too close with fiscal policy she will marry you. And the offspring are usually higher inflation and reduced fiscal discipline.”
Weidmann also said that France, as the second-largest euro zone economy, had special responsibility and that it was important that it stick to fiscal rules to build confidence.
“In the current situation we need to recognise that we are faced with a crisis of confidence,” Weidmann said, and added that lax enforcement of rules has led some to view deficits as moving targets.
“In such an environment it is in my view particularly important for the heavyweights in EMU (Economic and Monetary Union) to give clear signals, which boost the credibility of the fiscal rules and agreements in EMU and the credibility of their consolidation strategy,” Weidmann said.
“Commitments should always be binding.”
Over the weekend, German Finance Minister Wolfgang Schaeuble defended France against criticism from ECB Executive Board member Joerg Asmussen over its budget deficit, saying he believed that France will stick to its commitments.
The European Commission has forecast that France’s deficit will be 3.7 percent of gross domestic product (GDP) this year - well short of its 3 percent target under European rules - and Asmussen told Reuters on Friday that Paris faces a test of its credibility, urging it to take “concrete and measurable” steps to reduce the deficit.
Weidmann, who also heads the German Bundesbank, said that while consolidation is likely to have a short-term dampening effect on growth, there are no alternatives to that, adding that in the long term, it was “crucial” for growth.
Reporting by Leigh Thomas, writing by Sakari Suoninen. Editing by Jeremy Gaunt.