Photo Gallery: The Bundesbank's Position on Saving the Euro
SPIEGEL Interview with Bundesbank President Jens Weidmann 'Greece Must Live Up to Its Commitments'
SPIEGEL: Mr. Weidmann, your predecessor Axel Weber resigned last February, and early this month Jürgen Stark, the chief economist at the European Central Bank (ECB), also stepped down. How long will you last?
Weidmann: My term as Bundesbank president lasts eight years. I intend to serve out the entire term.
SPIEGEL: It won't exactly be an enjoyable task. German central bankers are noticeably isolated on the ECB Council.
Weidmann: I actually do enjoy my work. We are discussing the direction of monetary policy in a very difficult and complex crisis situation. In this context, I see myself as standing in the tradition of the Bundesbank's principles regarding stability, which the German public also supports. I will continue to defend this position on the ECB Council.
SPIEGEL: It's just that it doesn't do any good. The two German members of the ECB Council are opposed to buying up the bonds of deeply debt-ridden euro countries like Greece, Portugal, Ireland and Italy, but for months now representatives from southern Europe have outvoted you on this issue.
Weidmann: Just because you don't have a majority for your position at all times doesn't mean you should stop defending it.
SPIEGEL: But the number of your allies is constantly shrinking. When the ECB Council debated the purchase of Italian bonds in early August, only you and ECB chief economist Stark reportedly voted against it.
Weidmann: One of the customs of the euro system is not to discuss voting behavior. Nevertheless, my position on the purchases of government bonds is sufficiently known. As a result of many of our monetary policy measures, we helped prevent the crisis from escalating. However, the euro system added substantial risks to its balance sheet as a result. The necessary distinction between fiscal and monetary policy is being blurred, and individual measures are associated with special risks. That's why these risks have to be reduced.
SPIEGEL: But the issue was an acute emergency, at least according to the majority on the ECB Council. Interest rates for Italian government bonds had risen significantly, jeopardizing the viability of the credit markets. Can you understand this concern?
Weidmann: Of course I can understand these concerns. But it doesn't mean that I have to arrive at the same conclusions. It's a question of what incentives we create with our decisions. Interest rates in the capital market have a disciplinary effect. And if monetary policy intervenes in the markets, the pressure on the affected governments to introduce the necessary reforms is reduced.
SPIEGEL: Yet it was pressure from the ECB leadership that prompted the Italian government to introduce austerity measures. Doesn't this show that the ECB strategy is indeed effective?
Weidmann: From my perspective, these events actually demonstrate just how effective is the disciplining effect of rising capital market interest rates. Removing this incentive is problematic. And it is imperative not to create the impression that the central bank negotiates fiscal adjustment programs in individual countries.
SPIEGEL: You raise fundamental questions about the limits of monetary policy, while the majority in the ECB Council is more concerned about the survival of the euro. Are your principles more important than preserving the common currency?
Weidmann: I, too, am concerned about the future of the euro. But only elected politicians are democratically authorized to set up austerity programs or to put together bailout packages. If monetary policy intervenes here, it results in fiscal policy not being undertaken at all, or delaying action until it's too late.
SPIEGEL: But the problem is that the ECB is indeed the only institution capable of taking action in the crisis. The ECB is only supposed to perform a bridge function until the expanded bailout fund is in effect, which will then provide policymakers with the necessary instruments.
Weidmann: I would also like to see us reach the other end of the bridge quickly. But what if this so-called bridge leads to nowhere? It is both wrong and highly dangerous to create the impression that the ECB is the only player capable of taking action in the crisis. Fiscal policymakers are fundamentally capable of taking action.
SPIEGEL: National parliaments, however, still have to approve the expanded bailout fund, while the ECB is expected to intervene in the interim.
Weidmann: Once again: In the end, only fiscal policymakers have the mandate to decide on the assumption of such risks. Once monetary policy intervenes, there will always be reasons that supposedly speak in favor of continuing this measure. Of course, it would be wrong to stubbornly stick to one's principles in this extraordinary crisis. But it would be equally wrong to cite a general state of emergency as a reason to jettison all established principles of monetary policy.
SPIEGEL: This means that your colleagues on the ECB Council operate outside the mandate of monetary policy.
Weidmann: I didn't say that. No one on the ECB Council takes these decisions lightly. But it is indisputable that the purchase of bonds on the secondary market doesn't solve the underlying problems. The over-indebtedness of many national budgets and the lack of competitiveness of a number of euro-zone countries can only be corrected with effective reforms.
SPIEGEL: Does the purchase of government bonds signify the introduction of a liability and transfer union through the back door?
Weidmann: If we add risks to the balance sheet of the euro system, this means, of course, that risks are also redistributed among the taxpayers of individual countries. We have to further reduce these risks, because the German taxpayer must take responsibility for 27 percent of these risks…
SPIEGEL: … the Bundesbank's share of the euro system.
SPIEGEL: Because the measures introduced to date have been relatively ineffective, some market players propose a much bigger solution. They want the ECG to simply guarantee all government bonds, just as the chancellor guaranteed German citizens' savings deposits during the financial crisis. What do you think about that idea?
Weidmann: It would be clearly illegal. Besides, then there would be no sanction options at all and no incentives to pursue sound fiscal policy. For this reason, the markets would inevitably question the entire construct of the monetary union.
SPIEGEL: What exactly would happen if Greece were not to fulfill the conditions for the next tranche of aid payment? Would Greece no longer receive any money at all?
Weidmann: Part of the regulatory framework of the monetary union is to uphold agreements. This means that Greece must live up to its commitments, and that there will be no aid payments if these promises aren't kept. Otherwise we would be setting false incentives.
SPIEGEL: The consequence of such behavior, a Greek bankruptcy, doesn't scare you?
Weidmann: The goal should be to prevent this from happening, in that Greece implements the agreed reform program. It isn't helpful to speculate openly about what scenarios would ensue if the Greek government decides differently. But how credible can stricter rules be for the future, and that's the whole point of strengthening the Stability and Growth Pact, if a repeated violation of the rules results in aid coming from the community -- and under conditions that are relatively attractive? This sort of a system destroys the incentives for sound fiscal policy in the long term.
SPIEGEL: In the short term, however, there is the risk that a Greek bankruptcy will trigger another banking crisis.
Weidmann: All conceivable scenarios will have serious effects on the affected country itself, and on all countries. However, one has to consider which overall costs are higher in the long run. And in that sense, I believe that it's very important which incentives are set to promote sound government finances, and how one secures the acceptance of the monetary union in the countries providing the aid.
'There Is No Stable Middle Ground'
SPIEGEL: Would the risks of a Greek insolvency be manageable?
Weidmann: As I said, I don't want to get involved in speculation. But the European Financial Stability Fund (EFSF) will be expanded, partly to reduce the risks of problems spreading among individual countries.
SPIEGEL: Chancellor Angela Merkel has said that if the euro fails, Europe will fail. If that's true, then the euro must be defended at all costs.
Weidmann: If lawmakers decide to leverage the liability exclusion, they will have to create the necessary stable regulatory framework through stronger political integration, that is, a fiscal union. This would be a possibility…
SPIEGEL: …in the form of a United States of Europe, for example.
Weidmann: Such catchphrases need to be filled with content first. There are different forms of centralization, depending on how much leeway is to be left to the individual countries. In any case, rights must be delegated from the national to the European level.
SPIEGEL: In saying that, you are arguing for a completely new contractual basis of the monetary union.
Weidmann: No. All I'm saying is that lawmakers must decide between two models: a model with autonomous members, who are not liable for others and are disciplined by the market, and a model with deeper political integration. There is no stable middle ground. I think it's a dangerous approach to bring about a communization of liabilities among independent national fiscal policymakers, in the hope of achieving stronger political integration, without real intervention rights and sanctions.
SPIEGEL: That would seem to be the approach being taken now.
Weidmann: Certainly there is a danger that steps are taken down this path because it appears to be the more comfortable one.
SPIEGEL: Are your alternatives truly realistic? As the example of Greece shows, a return to self-reliance and sanctions through interest rates is not an option. And stronger political integration requires a new contractual basis complete with lengthy parliamentary processes, and possibly even constitutional amendments and referendums.
Weidmann: I think both approaches are feasible in principle, which doesn't mean that they're easy. The second option does indeed require time-consuming changes to the European treaties and national constitutions. It's important to take these steps in the right order and not to introduce the common liability part now, which might be more convenient for some, just because political integration is expected to occur at some point in the future. But I also feel that it would be promising, contrary to many prophecies of doom, to pursue a path returning to the origins of the real framework. It has to be strengthened, however.
SPIEGEL: That means returning to Maastricht, even though the model has just failed.
Weidmann: Not because the framework was wrong, but because the rules were violated and bent. Those who violate the rules must be sanctioned, and it has to happen automatically. It is not acceptable for sinners to be passing judgment on sinners. And the markets' disciplining function cannot be disabled.
SPIEGEL: What you refer to as disciplining is what many others see as an attack by speculators. Politicians feel that they are being driven by the markets. Is that without good reason?
Weidmann: Of course markets sometimes exaggerate. But fundamental aberrations are ultimately behind the loss of confidence in the public finances of the countries in question. The question is also whether we have a better means of applying discipline at our disposal than the markets.
SPIEGEL: Has your view of politics, the euro and the monetary union changed since you changed jobs?
Weidmann: When I was working in Berlin, I was always in contact with the Bundesbank, and my views were not far removed from the positions of the institution from which I emerged. Now I have new responsibilities with a clear legal mandate, which is to secure monetary stability. And that's what I support in the ECB Council and in public.
SPIEGEL: But in the past you were an advisor to an administration that now perceives you as a troublemaker when you don't play along in the ECB Council.
Weidmann: I don't see myself as a troublemaker, but I do take my responsibilities seriously -- and that's obvious. Whether or not Berlin likes this cannot be the criterion by which I judge myself.
SPIEGEL: Mr. Weidmann, we thank you for this interview.