NEWS Release - "Let’s not lose sight of the risks that our monetary policy poses to financial stability" - Interview with Jens Weidmann conducted by Isabelle Couet, Guillaume Maujean und Virginie Robert. - Translation: Deutsche Bundesbank
What do you think of Emmanuel Macron’s European initiatives? How the euro area has been governed is a point of conflict with Germany ...
I don’t think there is any conflict on this point. President Macron raises some very important questions and he has Germany’s backing in his aim to create a more stable euro area. But we should reach agreement on key points before discussing the finer details. What matters is that Emmanuel Macron is sparking debate.
What are these key points?
Above all, things need to be done in the right order – a discussion about risk-sharing or a common budget should not be an objective in and of itself. First, it is necessary to talk about which roles or responsibilities are best served at the European level rather than the national level. There are some areas which do affect us all, such as environmental conservation or border protection, which may require some competences to be transferred to the European level. Let’s define these roles and explain to people why we need to deal with them jointly and the advantages they bring, without forgetting the principle of subsidiarity either.
Furthermore, I think the strength of the European economy lies in the strength of its members, and each member needs to put its own house in order. In France, under Emmanuel Macron, we have a partner who is also taking responsibility for its own affairs. We are impressed by what we are seeing there, whether it is the speed at which reforms are being carried out or the range of these reforms. Europe will also benefit from them, even if their effects will only be felt in the medium term.
What role will be given to the European Stability Mechanism (ESM)? Will it still be useful once the crisis is over?
Not only should we keep it, we should also strengthen it. The IMF’s role in Europe is diminishing. We have now established an institution whose existence alone reduces the risk of crises, at least as long as it does not prompt anything to the contrary. I think the ESM should have more influence in budget supervision, which would help bring an end to the conflict of interest inherent in the European Commission. It is also an institution that creates policy and should be an impartial adjudicator in matters concerning budgetary regulation. I suggest the ESM should be responsible for examining the situation of member states’ public finances, preferably on the basis of simpler and clearer regulations. I also believe it should be the institution responsible for coordinating debt restructuring measures for member states, if necessary.
Doesn’t institutionalising government bankruptcy risk scaring the markets?
The key issue is rather knowing whether it is possible within the monetary union to exclude with certainty the eventuality of a state becoming insolvent. I don’t think this can be excluded, as member states are sovereign in matters of financial policy. Consequently, member states are responsible for their own debt. We should therefore take measures, as far as possible, to ensure that such an event does not destabilise the monetary union. These measures would create reliable opportunities for investors by respecting the structure of a market economy. I therefore propose including in the ESM’s lending conditions that the debt’s maturity is extended automatically when a country requests a financial assistance programme. A three-year extension allows time to determine whether a country is solvent and stops the taxpayer having to foot the bill for private creditors. This also increases considerably the capacity of the actual ESM assistance, since significantly less funds are required.
Some ideas are being floated, such as GDP-indexed bonds or the securitisation of government debt ...
The first instrument is interesting because if there is an economic slowdown, the government will bear less financial risk, which could strengthen budgetary and financial stability. The Banque de France has discussed this idea and it merits consideration. However, this type of instrument is more complex and riskier than fixed-rate bonds, and participants on the financial markets need to be able to bear these risks. Furthermore, this proposal raises several other questions, as does the securitisation idea, which aims to create safe assets. In any case, the prerequisite for safe government debt is a sustainable budget. Such a step must not lead to the mutualisation of debt by the back door and should be taken by the market itself.
The European Central Bank decided on 26 October to scale back its bond-buying, but did not say when it would terminate the programme. Is the Council split on this issue?
There may have been disagreement on the question of when the programme should end, but the thing to stress is that there was general consensus regarding the analysis of the economic situation, which is seen as fairly positive. We remain convinced that we can bring inflation back to the medium-term objective. We also agree on the continued need for an expansionary monetary policy. And I would like to underscore that the stock of debt purchased by the ECB will not decline even if the flows of purchases fall to zero, as we reinvest the proceeds from the bonds as they mature. That will maintain an extraordinary monetary stimulus.
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