Bundesbank President on ECB Bond Purchases: 'Too Close to State Financing Via the Money Press'
Part 2: 'Germany Has Taken on Considerable Risks'
Weidmann: If the central bank were obliged to guarantee that member states remain in the euro zone at all costs, it could come into conflict with its key mission of maintaining price stability. I also don't see how it's possible to fundamentally rule out that a sovereign member state might decide to leave the monetary union.
SPIEGEL: The European treaties make no provisions, though, for a country to leave the monetary zone. Doesn't that have to change?
Weidmann: European politicians have been discussing for quite some time now what would happen if countries don't keep to the terms of their agreements
SPIEGEL: ... namely, they would receive no more aid money and would thus de facto be forced to leave the monetary union.
Weidmann: If it came to that, the central bank would be in no position to do anything to prevent that from happening, for example by plugging the shortfall in financial aid.
SPIEGEL: You are asking a great deal of politicians. Isn't it fair if the central bank also makes a contribution and is prepared to purchase sovereign bonds, as ECB President Draghi has proposed? After all, this is merely intended as a temporary measure.
Weidmann: That's the hope. But it will be extremely difficult to close that door again, once it's been opened. The bonanza from the central banks would raise expectations (that it would keep happening) and result in a collectivization of risks.
SPIEGEL: Didn't we already reach that stage a long time ago? Former German Foreign Minister Joschka Fischer of the Green Party says that it's long since become reality, and Carsten Schneider, a finance expert for the center-left opposition Social Democrats (SPD), says that Germany's euro-zone risk has now reached 1 trillion ($1.25 trillion).
Weidmann: I don't want to comment on individual calculations here. In any case, it's true that Germany, as well as many other countries, has taken on considerable risks in the process of stabilizing the euro zone. In return, the countries in the fiscal bailout programs have committed themselves to painful reforms. Financial aid in return for reforms -- Europe's bailout policies are taking the right approach here, at least in principle. But it only works if the underlying problems are really tackled, and if the programs are designed and monitored in such a way that people don't lose sight of budgetary discipline.
SPIEGEL: Your analysis is based on the assumption that the financial markets always act rationally during the euro crisis. But that hasn't been the case. When Spain presented a program to bail out the banks to the tune of 100 billion, interest rates on bonds subsequently rose. But when ECB President Draghi said three cryptic sentences, yields plummeted.
Weidmann: That doesn't have to be irrational. No one denies that the central bank has the power to exert short-term influence over the markets. But the central bank is not omnipotent. Remember the euphoric op-eds that were published when the Eurosystem purchased sovereign bonds for the first time? Or how the markets cheered the liquidity assistance provided by the central bank for European banks last winter? But we all know that such actions do not solve the fundamental problems. Our actions are based on trust. Doing more and more does not always engender more trust. Over the long term, the central bank can only preserve trust if its actions conform to the mandate that it has been entrusted with.
SPIEGEL: You already said some time ago that the central bank had pushed its mandate to the limit. Will Draghi's new plans cause it to overstep this limit?
Weidmann: At any rate, I would like to avoid seeing monetary policy fall under the dominance of fiscal policy.
SPIEGEL: Our question is rather whether Draghi's plans are compatible with the current treaties and thus legal.
Weidmann: As a central bank president, I prefer to argue along economic lines. I don't want to comment on legal opinions here. What's important to me is taking a well-founded position that is sustainable in the long term. Moreover, we shouldn't underestimate the danger that central bank financing can become addictive like a drug.
SPIEGEL: But Draghi only wants to provide money if a country submits to a strict reform program. Isn't that a way to provide assistance without writing a blank check?
Weidmann: At first glance, this of course looks like a good idea. But at second glance, it becomes clear that it leads to coordinated actions between the government rescue funds and the central bank. This results in a linking of fiscal and monetary policy.
SPIEGEL: According to the plans, the ECB would only intervene if certain interest rate ceilings were exceeded -- independent of what politicians say. That would make the rules clear.
Weidmann: I won't report here on ongoing discussions. Determining interest rates for sovereign bonds in the ECB Governing Council would be, at least for me, a controversial idea.
SPIEGEL: You are currently very isolated with this opinion on the ECB Governing Council, in which the heads of the central banks decide on monetary policy.
Weidmann: I can hardly imagine that I'm the only one who feels uncomfortable with this.
SPIEGEL: Many of your central bank colleagues, though, appear increasingly irritated by the endless objections of the Bundesbank. ECB head Draghi recently publicly named you as an opponent of his plans. Isn't that breaking a taboo?
Weidmann: On the contrary, I see transparency as important in the current situation. We central bankers are now operating in a gray zone and an increasing number of fundamental issues are coming to the fore. So we have to be prepared to publicly comment on the positions that we take on the council.
SPIEGEL: Until now, it was seen as taboo to comment on internal discussions in public.
Weidmann: The ECB Governing Council is not a politburo. In the US, the minutes of Federal Reserve sessions are even published.
SPIEGEL: Can you at least be certain that the German government stands behind you on this issue?
Weidmann: I support the positions that I believe are appropriate as the Bundesbank president and a member of the ECB Governing Council. In doing so, I don't take my cue from the German government's position. That's part of being independent.
SPIEGEL: Even members of governments such as Finnish Prime Minister Jyrki Katainen are now publicly questioning whether the monetary union has a chance of being saved this way. Has the euro rescue failed?
Weidmann: I see no reason for such fears. The heads of government of the euro zone have just recently expressed their clear commitment to the euro, and I am confident that they are aware of their responsibilities and will take appropriate action. Ireland and Portugal have already made remarkable progress with their reforms. I also view the initiatives in Spain and Italy as positive. Fiscal rescue mechanisms are available for emergencies, and politicians can decide on their structure and volumes. They can, in the correct order, take additional steps toward integration. All of this is doable. What I don't agree with is that some people are conveying the impression that in the crisis only the central bank can prevent a supposedly critical increase in interest rates. The best way to reduce interest rates over the long term is to decisively implement promises and agreements.
SPIEGEL: Things are looking rather bleak, though, in the country where the euro crisis started. Next month, the troika of the European Commission, the International Monetary Fund (IMF) and the ECB will decide whether to approve the next tranche of aid for Greece. Does this country still have a chance, in your opinion?
Weidmann: Let's wait for the troika's report first.
SPIEGEL: What will happen if the inspectors come to the conclusion that Greece has neglected the agreed-upon austerity measures? Will we then have to allow the country to go bankrupt?
Weidmann: That is a decision to be taken by the member states that are providing assistance and by Greece itself. It has many facets, not all of which are economic. Indeed, it also certainly plays a role that there should be no additional loss of confidence in the framework of the monetary union, and that the economic conditions of the rescue programs should retain their credibility.
SPIEGEL: Why is that?
Weidmann: Otherwise I doubt that the leader of another country in the program could convince his parliament to support additional austerity measures.
SPIEGEL: You appear to be the last representative of German ideas of stability on the ECB Governing Council. Did you know what you were getting yourself into when you assumed your current position last year?
Weidmann: I knew the situation that awaited me. But I'm convinced that it's worthwhile speaking out in favor of monetary stability and to keep a focus on the long-term success of the euro.
SPIEGEL: At the moment you are really taking a beating, though. Will you end up resigning from the ECB, just like Bundesbank officials Axel Weber and Jürgen Stark, who quit in protest over the bond-buying program?
Weidmann: I can carry out my duty best if I remain in office. I want to work to make sure the euro stays as strong as the deutsche mark was.
SPIEGEL: Mr. Weidmann, thank you for this interview.
Interview conducted by Georg Mascolo, Michael Sauga and Anne Seith. Translated from the German by Paul Cohen.
- Part 1: 'Too Close to State Financing Via the Money Press'
- Part 2: 'Germany Has Taken on Considerable Risks'
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