German Central Bank Head Weidmann: 'The Euro Crisis Is Not Yet Behind Us'
An extended period of calm on the bond markets has led many to conclude the euro crisis is over. But German central bank head Jens Weidmann says in an interview that the coast still isn't clear and that there is still great need for reforms.
SPIEGEL: Mr. Weidmann, you are notorious for being a tough critic of European Central Bank President Mario Draghi. But the euro crisis seems to be over, largely thanks to ECB intervention. Has he not been proven right?
SPIEGEL: Yet Spain, once wracked by the euro-zone crisis, can today borrow money more cheaply than ever before in the history of the monetary union. Do you not think that is a consequence of Mario Draghi's 2012 pledge to save the euro "whatever it takes"?
Weidmann: You shouldn't mistake the thermometer for the illness. I have never disputed that the ECB could impress and move the markets with the announcement that it would make massive purchases of sovereign bonds if necessary. But such measures focus on the symptoms and don't cure the causes of the crisis. As such, the current calm is misleading and even dangerous, because it takes pressure off of the governments to implement badly needed reforms. If they are not undertaken, investors could quickly change their risk evaluations.
SPIEGEL: But if the ECB hadn't intervened, the euro zone patient may well have died from its 2012 fever.
Weidmann: I don't believe that is the case. In reaction to the crisis, policymakers established a multibillion euro bailout fund to assist the crisis countries in exchange for their adherence to certain stipulations. That was the correct, democratically legitimate path. Even more so given that the bailout fund can also purchase sovereign bonds. The central bank in the euro zone, by contrast, is forbidden from providing credit to countries and from purchasing sovereign bonds on the primary market. By making targeted bond purchases on the secondary market, the ECB opened itself to accusations of skirting this ban.
SPIEGEL: Since the beginning of the financial crisis, the European Central Bank has injected liquidity into the markets at decreasing intervals. It is a bit reminiscent of a junkie who has to continually up the dosage to have the desired effect.
Weidmann: It is certainly true that after each loosening of monetary policy, the public immediately begins speculating about what might come next.
SPIEGEL: Most recently, in early September, the ECB Governing Council reduced the already low interest rate of 0.15 percent to 0.05 percent. What will that accomplish?
Weidmann: That wasn't the only measure taken. After a controversial discussion, agreement was reached on a purchasing program for covered bonds and asset-backed securities (ABSs) and the effect of the entire package must be evaluated. No matter what one's views on the content of the package, the ECB council has demonstrated that monetary policy is prepared to go far and break new ground.
SPIEGEL: The focus was more on the message sent rather than the real economic effects?
Weidmann: There isn't necessarily a contradiction between the two. Monetary policy signals can be used to influence the expectations of consumers, investors and companies. The focus is no longer just on stimulating the credit markets, but also on pumping money directly into the economy if need be. That is why the most recent decisions made by the ECB council, in my estimation, mark a critical juncture and an incisive change in the ECB's monetary policy.
SPIEGEL: Are there even sufficient securities in circulation for the ECB to spend several hundred billion on their purchase?
Weidmann: If we want to avoid highly risky securities and keep away from buying out an entire market, it is questionable. For the program to have an effect, the purchases would have to completely rejuvenate the market for new securities.
SPIEGEL: Which is why it is likely only a matter of time before the ECB begins buying large quantities of both sovereign and company bonds. Would you agree to such a program?
Weidmann: I don't think much of speculating on what other actions might be added immediately following the introduction of new measures. Those who feed such speculation call into question the effects of those just introduced. My position on sovereign bond purchases is well known and has not changed.
SPIEGEL: Low inflation in the euro zone has also been presented as a justification for such measures. What is so bad about the fact that prices are not increasing?
Weidmann: From the perspective of the public, nothing at first. On the contrary, they are able to buy more for their money than they would if inflation were higher. But there are good reasons why the ECB council strives for an inflation rate of under, but close to, 2 percent, thus maintaining a safety margin from the zero line. An average inflation rate of zero in the euro zone would mean that prices and nominal wages would climb in some countries whereas they would have to fall in other countries. Experience shows that such a situation is difficult to manage. Even under the intense pressure to reform, nominal wages in crisis countries have, at least, not fallen. In addition, without a safety margin monetary policy reaches its limits more quickly, from which it can no longer furnish interest-policy stimulus. The prime rate cannot, after all, be reduced too far below zero.
SPIEGEL: How realistic is the danger of deflation in the euro zone?
Weidmann: The probability of a problematic deflationary development is very low. The decline of the inflation rate is largely due to sinking energy and commodity prices. As a central bank, we don't have any direct influence on that and the effects on the inflation rate are only temporary insofar as, for example, companies and trade unions don't react with their wage agreements. In addition, adjustment processes in the crisis countries are behind the development. During the adjustment period, not only economic growth, but also price pressures will be dulled. Rapidly overcoming this phase is another reason structural reforms must be resolutely implemented.
SPIEGEL: Is not the ECB taking advantage of deflation fears to push through instruments that it shouldn't really be using?
Weidmann: If a central bank is in danger of missing its inflation target in the near future, its credibility demands that it consider unconventional instruments within its mandate. Which doesn't mean that each of these instruments is equally appropriate.
SPIEGEL: But you just said that the low inflation rate is the result of normal factors. Why should it then be combatted?
Weidmann: We can't change the current rate of inflation. Our monetary policy targets future developments. For their future planning, households and corporations have to be able to depend on mid-term prices climbing at an annual rate of almost 2 percent, in accordance with our announcements.
SPIEGEL: Nevertheless, you would have preferred that no action were taken at the last ECB council session.
Weidmann: It was very much possible to have a different assessment regarding the need to take action, particularly given that new ECB forecasts have not changed the inflation rates expected for next year and the year after. As ECB President Draghi said in the press conference, we had divergent views as to whether it was absolutely necessary to introduce far-reaching purchasing programs and regarding the risks and side effects the recent resolutions might have. Especially in light of the fact that the liquidity measures announced in June hadn't even been initiated.
SPIEGEL: Christian Noyer, head of the French central bank, said that the new measures are also aimed at pushing down the euro exchange rate. Is that the task of the ECB?
Weidmann: Absolutely not, and I believe that Christian Noyer was misunderstood. Of course our decisions have an influence on the height of the exchange rate which then has an effect on the development of inflation. But we are not pursuing a monetary policy that targets the exchange rate. Policies aimed at intentionally weakening one's own currency would also not be consistent with G-20 agreements. More than anything, a weak currency is not a good way to ensure lasting growth.
SPIEGEL: Via its ABS purchase program, the ECB balance sheet will soon include bank loans in the form of securities. Would that not threaten to turn it into Europe's bad bank?
Weidmann: That depends on what is purchased and at what price. If at all, the ECB should only buy low risk securities -- and only after careful evaluation. More than anything, the ECB should not pay higher prices than a private investor would. What's clear is that if the ECB does take on risky securities or pays inflated prices in order to reach the targeted purchase volume, it ultimately burdens taxpayers. Which is why it is important to limit the program's risks and ensure complete transparency regarding the purchases.
SPIEGEL: Does the course currently being followed by the ECB mean that the collectivization of debt, a process opposed by Berlin, is being introduced through the back door?
Weidmann: Depending on how the program is designed, there is a danger that banks might be freed from risks on the backs of taxpayers. But that is surely not the function of the ECB. It would also contradict the current regulation efforts aimed at making shareholders and creditors liable. That is why it is decisive that the purchasing program does not take on appreciable risks either from financial institutions or countries.
SPIEGEL: That will be difficult. ABSs are primarily issued in the Netherlands, Italy, Spain and France, countries where banks have many questionable loans on their books. What is the point at which you say you can no longer support the course charted by the ECB?
Weidmann: If I am unable to support a specific measure, I don't vote for it and I energetically throw my support behind a different course of action. Only in that way is it possible to influence decisions, sometimes to a greater degree than others. But I am certain that, without the influence of Germany's central bank, important decisions would be made differently.
SPIEGEL: You wouldn't be the first German to leave the ECB in frustration.
Weidmann: When I took office, we were already in a difficult monetary policy phase. I was aware of the conflicts that might be facing me. I do not wish to, nor will I, run away from them.
SPIEGEL: You are seen as the great doubter while Draghi is celebrated as Europe's savior. Does that bother you?
Weidmann: Such generalizations miss the point and are not helpful. Mario Draghi has also repeatedly pointed out that monetary policy alone isn't enough to save Europe. I am convinced that a central bank that allows itself to be pressured by politics risks its independence. If a central bank compensates for a lack of political action, the pressure to do so over and over again will constantly increase and it runs the risk of losing sight of its price stability targets.
SPIEGEL: Supporters of this course of action say that the ECB has to do something because politicians are abdicating their responsibility for finding a solution. Are they not right?
Weidmann: The view of democracy that informs this question is not one that I share. If elected politicians don't take action for fear of voter dissatisfaction then a small circle of central bankers, who are not elected and who don't have a mandate for economic policy, should not allow themselves to be seduced into taking on the role of policymakers. Such a procedure is not a sound foundation for the collective European house.
SPIEGEL: Just as you are largely isolated in the ECB, German Chancellor Angela Merkel is largely alone when it comes to European policy. Most countries are demanding that austerity be loosened. What is wrong with giving crisis countries more time to solve their problems?
Weidmann: I don't see Germany as being isolated. Precisely those countries that have implemented far-reaching reforms in recent years and consolidated their budgets against political opposition are now calling on larger member states to conform to the rules. Furthermore, we shouldn't forget that the sovereign debt crisis was triggered by doubts about the stability of the public budgets of some euro-zone member states. If we want to address the causes, a credible course toward stable state finances must be charted. Reaching agreements when the pressure is on only to scrap them when pressure drops cannot be part of that course.
SPIEGEL: Still, the goals must be realistic. Is there not a danger of strangling the economy via austerity?
Weidmann: We are far away from that. In some countries, the deficits have been over 3 percent for years and this year too will see six euro-zone countries transgress the deficit limit. The danger I see is that the necessary budget consolidations will be delayed and that the trust that has been lost won't be built up again quickly enough. Solid budgets, furthermore, are a precondition for, not a contradiction to, sustainable economic growth.
SPIEGEL: Draghi, though, wants to stimulate the economy. Among other measures, he is gathering support for an investment program worth more than 300 billion.
Weidmann: Before that can happen, it must be seen how the program, proposed by incoming European Commission President Jean-Claude Juncker, is to be financed. In any case, it cannot lead to the abandonment of consolidation. And each project must be examined to determine if the investment carries benefits for the economy in its entirety. The past has shown that not all public investments were sensible, neither in the crisis countries nor here in Germany.
SPIEGEL: What is your recipe for increased growth?
Weidmann: Growth and jobs are ultimately produced by private companies. That is where investment must take place. To promote that, the public sphere must create the necessary framework. I believe that the improvement of administration structures in many crisis countries, for example, is much more important than reflexively demanding that new streets and bridges be built. If you have to wait months for an operating or construction license, that doesn't promote the willingness to become active as an entrepreneur. In addition, public budgets must be consolidated, labor markets must be made more flexible and banks must be stabilized as promised so that loans can once again be made. And there has been progress on those issues.
SPIEGEL: But not in France and not in Italy.
Weidmann: There too governments have realized that there is a need to act. The examples of Spain and Ireland show that structural reforms are worthwhile. The governments of both those countries were recently able to make significant upward adjustments to their growth forecasts.
SPIEGEL: What if France and Italy continue on as they have?
Weidmann: The longer these two large countries refrain from creating the conditions for growth and stability, the longer the euro zone's weakness will continue -- and with it, the pressure on monetary policy.
Weidmann: That isn't the question. The ECB contributes to the success of monetary union by keeping monetary value stable. That is our legal mandate. Member states, for their part, have to make their economies fit for the common currency. Those are the rules of the game that all have agreed to.
SPIEGEL: Mr. Weidmann, we thank you for this interview.
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