July 5, 2018 / 12:48 PM / 9 months ago

Central bankers pour cold water on EU spending ambition

FILE PHOTO: German Bundesbank President Jens Weidmann is pictured Frankfurt, Germany, February 27, 2018. REUTERS/Ralph Orlowski

LINZ, Austria (Reuters) - Two euro zone central bankers poured cold water on Thursday on ambitions to give the European Union more powers to spend common cash when the economy sours.

EU leaders agreed last week on giving the bloc’s bailout fund a bigger role but left difficult issues like a euro zone budget or deposit insurance for an undefined future point.

Bundesbank President Jens Weidmann and European Central Bank board member Yves Mersch said the recourse to common money would lessen the incentive for European governments to run sound fiscal policies.

“Why, for example, should a government refrain from risky policies if, at the end of the day, the community has to pay the bill?,” Weidmann said at a conference organized by Austria’s central bank.

Mersch also said recent proposals, by the EU’s executive Commission as well as France and Germany, did not go far enough in fighting such “moral hazard” and could even “reward policy-induced increases in unemployment”.

But he praised a Franco-German proposal to make it easier to restructure government debts when they are deemed unsustainable.

“The recent Franco-German proposal to introduce single-limb collective action clauses and moves to align the roles of the ESM (European Stability Mechanism) and the IMF (International Monetary Fund) in debt restructuring negotiations are sensible first steps,” Mersch said.

Reporting by Francesco Canepa; Editing by Catherine Evans

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