NEWS Release - Weidmann: rein in government debt effectively
Copyright © 2016 Deutsche Bank AG, Frankfurt am Main
In remarks delivered at the Institut Ökonomie der Zukunft in Karlsruhe, Bundesbank President Jens Weidmann made the case for steps towards euro-area reforms in order to make the currency more stable, adding that measures to rein in government debt effectively were urgently necessary.
He saw a need for transparent fiscal rules and their rigorous enforcement. Weidmann noted, however, that the binding force of the fiscal rules was "weaker than ever before".
"Although the indebted countries' debt ratios will decrease slightly over the next few years, the gradual improvement in the economic situation and the very favourable funding conditions are masking a loosening of the fiscal stance in the euro-area countries," said Weidmann. Three-quarters of all euro-area countries were still set to remain far removed from a sound fiscal position in 2018. "That is not what fiscal consolidation looks like," said the Bundesbank president.
Joint control
In Weidmann's estimation, member states remain disinclined to cede sovereignty rights to the European level. For example, at the informal meeting of EU finance ministers and central bank governors in Bratislava, a joint unemployment insurance and a European investment fund were discussed. However, the suggestions contained little in the way of specific measures which would enable genuine joint control.
According to Weidmann, absent deeper political integration, the only way to enhance the monetary union would be the decentralised approach provided for in the Maastricht framework. He explained the reforms which he deems necessary if unhealthy developments in one part of the monetary union are not to jeopardise the stability of the whole.
Sovereign default as a last resort
"It must be possible in future for heavily indebted states to default as a final resort without bringing the financial system to its knees and forcing the international community to come to the rescue," said Weidmann. He anticipates that this could enable capital markets to better exercise their disciplinary function for fiscal policy in future.
According to Weidmann, banks must hold sufficient capital to be able to absorb any losses from government bonds so that the restructuring of national debt does not jeopardise stability. What is more, they should no longer be allowed to purchase an unlimited quantity of government bonds.
Furthermore, Weidmann explained the Bundesbank's proposal to extend the life of government bonds of euro-area countries automatically by three years if the member state applies to the ESM for assistance. Programme countries also use ESM funds to pay off the maturing bonds, he said. But if, following an assistance programme, the debts were still too high, the haircut that would then become necessary would come at the expense not of the original creditors but of European taxpayers. This does not exactly foster willingness on the part of the member states to agree to a debt restructuring process, as Weidmann explained. "Instead of a truly viable long-term solution being reached, when push comes to shove, a strategy of muddling through wins the day," he said. Automatic extension of the maturities would keep the creditors on the hook.
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