FRANKFURT (MNI) – There is no alternative right now to quickly
restoring governments’ budgets to order, European Central Bank Governing
Council member Axel Weber said Friday.
Furthermore, sustainable public debt levels must be a key policy
priority for governments, the head of the Bundesbank said in remarks
prepared for delivery in Rio de Janeiro.
The reduction of deficits is “vital,” and a “frontloaded credible
consolidation strategy is thus of key importance,” he argued.
Given contagion risks, safeguarding the stability of both the
monetary and financial systems “should be seen as the rationale behind
some of the recent liquidity support measures adopted by the
Eurosystem,” Weber said.
Public debt levels have risen not only in Europe, but worldwide,
Weber observed. In the industrialized world, this has been a result of
stabilization mechanisms to help both the financial system and the real
economy combat the downturn.
“Today, there is no alternative to the rapid and credible
consolidation of public finances,” he declared.
A lack of confidence would undercut the efforts of the current
fiscal stimulus and would in turn result in higher financing costs, thus
making consolidation even more difficult, Weber explained.
“Furthermore, confidence in the soundness of public finances is a
major prerequisite for both the stability of financial markets and the
anchoring of moderate inflation expectations,” he said.
“Fiscal policy has to deliver sustainable public debt levels as a
key policy priority at the current juncture,” he said.
In a broader discussion of monetary policy, Weber noted that
enthusiasm for the notion of a higher inflation target “seems to be
fading,” perhaps because recent developments have shown that the “zero
interest bound does not constitute a restriction on monetary policy.”
“In our case, the flexibility of monetary policy in Economic and
Monetary Union has not been limited during the crisis despite very low
interest rates,” he said.
“In the Eurosystem, unconventional measures have allowed us to
provide liquidity to market participants and thereby deter deflationary
expectations,” he added.
Weber was more favorable toward the idea of price-level targeting,
but still said “price-level targeting cannot be regarded as a viable
monetary policy strategy until we know much more about its potential
benefits and costs than we do at present.”
“But it is definitely worth pursuing this line of research further
in the future,” he insisted.
The question of the role played by asset prices in monetary policy
has been raised again during the crisis, but “well-known” arguments
against a “lean against the wind” strategy in monetary policy are still
valid, Weber argued.
“Financial bubbles are difficult to identify and difficult to
moderate using monetary policy instruments,” he said.
Given the interdependence between monetary policy and the financial
cycle, “we must improve our understanding of the impact of monetary
policy on banks’ behaviour and vice versa,” Weber said.
Recent experience has “clearly shown” that imbalances in the
financial system can result in an economic downturn and thus create
deflationary risks, he noted.
Yet, the financial cycle is not “exogenous to the strategic
orientation of monetary policy,” he stated, reiterating that monetary
policy can influence risk-taking behavior.
“Thus, monetary policymakers taking these factors into account
should respond symmetrically to financial cycles. This will not prevent
boom-bust cycles in asset prices, but might contribute to somewhat less
volatile financial cycles,” he said.
Responding symmetrically to financial cycles does not suggest that
monetary policymakers should be responsible also for financial
stability, Weber insisted.
“In my view, ensuring price stability over the medium term remains
the appropriate objective of monetary policy,” he said, adding that the
short-term interest rate is “basically” the one instrument that
policymakers have to achieve this goal.
“Given that short-term interest rates are too blunt a tool to
safeguard financial stability, financial stability should not become an
additional independent objective of monetary policy,” he argued.
–Frankfurt bureau; +49-69-720142; tbuell@marketnews.com
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