FRANKFURT (MNI) – The European Central Bank’s new bond-buying
program could do more harm than good if it eases pressure on Eurozone
governments that need to undertake reforms, ECB Governing Council member
Jens Weidmann said in an interview with a Swiss paper released Tuesday
evening.
Weidmann, who heads the German Bundesbank, also told the Neue
Zuercher Zeitung that the markets’ initial positive reaction to the
September 6 unveiling of the program – known as Outright Monetary
Transactions – should not be the measure of its success.
Weidmann, who was the only member of the ECB Governing Council to
oppose the OMT, laid out a broad series of risks he saw in the new
bond-buy program, including to the ECB’s balance sheet and credibility,
and insisted he was not the only Governing Council member with concerns.
The Bundesbank president said central banks could not be made into
the only “problem solver” in the crisis. Asked whether ECB President
Mario Draghi was right to declare the euro’s irreversibility, Weidmann
said this was a decision only for government policymakers.
“We cannot and should not stand against political decisions about
the composition of the Eurozone,” Weidmann said. “Such decisions can
only be taken by democratically legitimized bodies,” he said.
Weidmann argued that maintaining price stability remained the ECB’s
primary mandate. Ensuring the Eurozone’s financial stability, while
important, came second, he said.
“There is a very clear hierarchy for us. Our primary goal is price
stability. The financial stability mandate is below this and is not a
blank check,” Weidmann said.
The Bundesbank president warned that more bond buying carried
“considerable risks” for the ECB’s balance sheet and went against the
central bank’s policy of keeping risks low. Making the OMT conditional
on a country’s seeking aid from the ESM rescue fund, while helpful in
some respects, risks tying monetary policy too closely to fiscal policy,
he affirmed.
“Nobody disputes that the central bank can influence yields
temporarily if it announces that it will intervene in markets. But the
short-term reaction of the markets cannot be the measure of central bank
policy,” he said.
“There is the simple question of whether the program does more good
or more harm in the long run. If the central bank’s help takes pressure
away from policymakers to make headway in the reform process, then
overcoming the crisis could be delayed and more difficult,” he said.
“Once the central bank goes down this road, it could in the end
become a prisoner of its own policy and lose credibility,” Weidmann
argued.
Weidmann said the OMT program would not necessarily have been
needed to safeguard financial stability, arguing peripheral EMU members
could have tolerated sovereign bond yields over 7% for a time. He also
rejected the argument that markets have behaved irrationally, arguing
that wide yield spreads between core and peripheral EMU members were the
result of doubts over peripheral governments’ ability to carry through
reforms, as well as deleveraging that has tightened credit conditions in
some countries.
“Are sovereign bond buys even the right instrument to repair the
monetary transmission mechanism, in the face of structural problems,
such as a lack of competitiveness and a loss of trust in the state
finances of individual countries?” Weidmann asked.
Weidmann said the ECB “has already done a lot” by bringing interest
rates to historic lows, providing banks with unlimited liquidity, easing
collateral requirements and buying bonds under its previous SMP program.
“The Euro System has undertaken very many actions, but monetary
policy should not be over-extended,” he warned.
In other comments, Weidmann said resigning was “no option” for him.
— Frankfurt bureau: +49 69 720 142; email: ccermak@mni-news.com —
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