LONDON (MNI) – The Eurozone will see more heterogeneity in coming
years and Germany, as a result, will face more inflation, European
Central Bank Governing Council member Jens Weidmann predicted Wednesday.

“My take is that we will see more heterogeneity, more diverse
developments in the euro area in the years ahead, with Germany being at
one end of the spectrum and other countries being at the other,” the
Bundesbank president told a conference here.

“Meaning,” he added, “you will see inflation pressures rise in
Germany.”

“I don’t feel comfortable watching prices soar in Germany,”
Weidmann continued. “There’s certainly something we need to act on. But
monetary policy …is geared to … the area as a whole and increasingly
geared to some specific countries where the problems are particularly
large.”

Queried on Target 2 imbalances, Weidmann said that the “obvious”
fact that “this balance is no longer there” needs to be seen as “a
symptom of the crisis.”

“A lot of the peripheral countries are heavily dependent on our
refinancing operations,” he pointed out. The imbalances per se are “not
a problem as long as the Eurozone stays together, which is our main
scenario.”

Turning to the inevitable trade-off between short-term responses to
the crisis and longer-term benefits from reform, Weidmann called it
“important not to completely discard the long-run incentives.”

“We all agree we need to buy time to allow the adjustment process
to happen,” he said.

Pondering the efficacy of the EU’s new Fiscal Compact, Weidmann
asked, “If you prescribe tougher sanctions in there but at the same time
allow under the rescue mechanism funding that is a lot cheaper than the
countries under the rescue mechanism have access to … is this
credible?”

What it comes down to, he said, is that “we should make sure that
the situation afterwards is not worse than before.”

Noting that Spain has said it will not achieve its original deficit
target agreed with Brussels, Weidmann said, “If on the day that the
Fiscal compact” is agreed, “a signatory government comes out and says
that” it reneges “on the agreed deficit targets and … unilaterally
change[s] the agreed targets, then I think this is not a perfect
starting point.”

“I still think the Fiscal Compact will be enacted,” he said.

Germany entered EMU under clear terms, including a prohibition of
monetary financing and bailouts for other countries, he reminded. These
conditions were “needed to cope with the problem of the deficit bias” in
a monetary union.

“You could have some kind of common liabilities, but then you need
some sort of control to balance that. And countries need to be ready to
give up some of their national sovereignty in such a case,” he said.

Weidmann observed that “markets tend to exaggeration on both sides
of the spectrum, and now you might argue that they’re overestimating
risk to some extent.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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