ECB Weidmann Warns Against Using Monetary Policy To Fix Fiscal Problems
fxbom.com
07:22 PM
FRANKFURT -(Dow Jones)- European Central Bank governing council member Jens Weidmann warned again Monday that policy makers must stop relying on central banks to fix fiscal policy problems, adding that Italy can solve such issues on its own, but at present isn’t nearly fully exploiting its growth potential.
The central banker, who also leads the Deutsche Bundesbank, told a conference that the “appropriation of monetary policy for fiscal policy purposes must come to an end.” He added that this is all the more true because continued monetary policy intervention in the realm of fiscal policy ultimately takes pressure off governments to reform. In the end, this doesn’t make a sustainable solution to the crisis easier, but rather delays it, he argued.
Weidmann also said that if monetary policy continues to stretch its inflation-fighting mandate, or to violate the prohibition of “monetizing” public debt, then “no less than its credibility is at risk.”
The central bank has been buying the debt of troubled euro-zone countries since May of last year, but has argued such measures aren’t financing, or “monetizing”, public debt, but rather are necessary to better transmit its monetary policy decisions.
Weidmann reportedly objected to the central bank’s resumed buying of government bonds in early August this year, a person familiar with the matter told Dow Jones Newswires at the time.
The central banker urged countries to embark on economic reforms and budget consolidation, even if these are painful. In the case of Greece, he said that this means “to insist on the adherence to the agreed adjustments as a requirement for financial assistance.”
Aid granted to Greece buys time for the country to implement necessary structural reforms, but it “cannot, however, replace these,” he reminded.
Italy on the other hand “can still master the current difficulties from its own strength,” he said. He noted, however, that the country is not nearly maximizing its growth potential. He said also that the country has accumulated a risky amount of debt.
-By Todd Buell, Dow Jones News, +49-69-29725514 , todd.buell@dowjones.com
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