–Updates Story From 1238GMT With Fear Of Muddling Through,Bank Union

FRANKFURT (MNI) – Exiting from accommodative monetary policy will
become more difficult over time, European Central Bank Governing Council
member Jens Weidmann said Friday.

Speaking at the European Banking Congress here, Weidmann
acknowledged that these were “not normal times” but warned it is
“important to keep in mind the long-term consequences of what we are
doing.”

“The balance of risks and benefits will shift over time and it is
getting more and more difficult to exit,” Weidmann said, arguing that
central bank actions continue to “distort” markets.

Pointing to the ECB’s three-year LTROs, Weidmann argued that, “the
short-term benefits might come at the expense of long-term stability.”
The provision of additional liquidity has “intensified the feedback loop
between banks and sovereigns that has proved so problematic in this
crisis.”

“It is inconsistent to argue that we have to break the link between
the sovereign and the banks (while) at the same time asking … banks to
fill their balance sheets with even more sovereign debt,” he argued.

Weidmann, the Bundesbank president, reiterated that monetary policy
should not be “overburdened” in the current crisis and warned that
central bank interventions risked delaying government reforms.

“Monetary policy is seen by many politicians as the easy way out,”
he said. While it “buys you time,” it might “lead to behaviour where you
just sit and wait,” he warned.

Weidmann said the “experience so far is not very comforting in this
respect…you buy time that is not being used.”

He said he was very skeptical about whether Eurozone leaders were
prepared to make the sacrifices necessary, in terms of surrendering
sovereignty, for a true fiscal union to be created.

Governments, he charged, are “not really honest about what fiscal
federalism and fiscal union really means.” There is a “tremendous
reluctance to accept a loss of sovereignty,” highlighted by the
push-back against controls even from those countries seeking European
aid.

Asked whether he expects the Eurozone to move towards a type of
fiscal federalism or rather towards strengthened national sovereignty,
Weidmann said he feared that “muddling through” was the more likely way
forward.

“Buying time is leading to more muddling through,” he said.

Weidmann also stressed that authorities need different policies to
address the different objectives of price stability and financial
stability. “This is where … the banking union comes in,” he said.

He added that a banking union was “a good step” towards “breaking
the link between banks and sovereigns,” which “is vital for making the
euro more stable.” However, he reiterated that the banking union should
not take on legacy assets.

Another proposal to protect banks against a possible unsustainable
build-up of government debt would be to place an “upper limit” on their
allowable exposure to sovereign paper, Weidmann added. Banks should also
have to back up their debt purchases with capital that is based on the
degree of risk being assumed, he said.

Asked how a banking union might have impacted the run-up to the
current crisis, Weidmann said that while it may not have prevented the
fallout, “I think it would have prevented some of the escalations of the
crisis.”

— Frankfurt bureau: +49 69 720 142; email: frankfurt@mni-news.com

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