Jens Weidmann, President of the German Bundesbank and member of the ECB Council, ventured into a veritable lion’s den with an interview in Le Monde, the number one liberal daily in France whose editorial bend has been supporting President François Hollande and his “growth” policies. And there, the central banker lashed out at Hollande and what he’d promised during the campaign. And he lashed out at the ECB, and at everything that smelled of a transfer union, and in passing at Paul Krugman and others who wanted the ECB to print with utter abandon to monetize the sovereign debt of debt-sinner countries, even more so than it has already done.
Le Monde called him “guardian of monetary orthodoxy,” whatever it meant by that because a central banker who insists on maintaining price stability rather than printing trillions to prop up the markets and enrich the bankers is closer in today’s crazy times to a monetary novelty than monetary orthodoxy.
“Being in favor of growth is like being in favor of peace in the world,” Weidmann said about the raging debate of growth vs. austerity. “The real debate is which path leads to sustainable growth,” he said. And the answer was clear: “structural reforms.” Debt-fueled spending would just create an “economic straw fire.” And then he added, “In fact, I’m asking myself what these discussions are hiding.”
Then he shot down European Project Bonds that Hollande has been pushing with all his might to fund infrastructure projects as part of his “growth” policies. “This debate irritates me a bit,” Weidmann said. “Every month, ingenious ideas to counteract the crisis surge out of nowhere before they disappear a month later. Now it’s project bonds…. It’s not a lack of infrastructure that is slowing down growth in these countries.”
While he was at it, he whacked at Hollande’s most cherished panacea for the debt crisis: “The belief that Eurobonds could solve the current crisis is an illusion,” he said, reflecting the opinion of his compatriots, an astounding 79% of whom were dead set against them, grasping how insidious these bonds would be for German taxpayers..
Eurobonds, which would spread liability for one country’s sovereign debt across all Eurozone countries, could only happen, if at all, “after a long process that would among other things have to include changing the constitution of several countries, modifying treaties, and having more of a budgetary union,” he said. “You don’t entrust someone with your credit card if you cannot control how much he spends.”
Communalizing national debts across the Eurozone would require “federalism,” he said. “But even in countries where governments clamor for Eurobonds, such as France, I see neither public debate on, nor popular support for the transfer of sovereignty that must accompany them.”
Federalism. A toxic word in Europe where each country proudly insists on its sovereignty. People are already complaining about the incessant intrusions of the EU in their daily lives. So, Le Monde asked, was there a way out of the euro crisis without “jumping into federalism?”
Well, “I’m convinced that clarity on this subject would help us,” he said. “Investors not only worry about the situation in one or the other country, but also about the functioning of the Eurozone as a whole.”
What about regaining the confidence not just of investors, Le Monde asked, but also of populations?
“You have to find the equilibrium between economic necessities and political limits,” he said. “Reforms in countries that receive aid are necessary: they may be hard, but they permit the country to pick itself up and not depend indefinitely on others.” And he warned of “a transfer union” where the debts of one country would forever be paid by others. “Our role as central banks is to guarantee price stability in the Eurozone. I’m convinced that the future of the euro is fundamentally linked to the support of the population, and that this support depends on the confidence Europeans have in the stability of their money.”
He refused to say if he was bracing himself for Greece’s exit from the Eurozone, but he left little doubt: “We will see if the agreements underlying the solidarity of other countries are respected. And if necessary, the aid should be stopped.” Then he hammered home his point: “The decision is now up to the Greeks.”
Hollande would like for the ECB to support growth more vigorously, Le Monde said—conveniently forgetting that, after a series of devaluations since 1945, the French franc was “revalued” in 1960 at 100 old francs to 1 new franc. Confidence-inspiring notes were printed, and the dance started all over again: from 1960 through 1999, when the franc was replaced by the euro, it lost another 88% of its value—due to France’s habit of monetizing its debt. A fate Germany has tried to avoid. And so, Le Monde asked Weidmann if he could “envision an evolution of the ECB’s mandate.”
Um, no. “The mandate is deeply rooted and stems from the lessons learned during the seventies and eighties,” he said. “It’s when a central bank ensures price stability that it contributes the most to durable growth.”
He lamented that the balance sheet of the ECB has more than doubled since the financial crisis and was larded with risks “to avoid a collapse of the system.” But these were “risks for taxpayers, particularly in France and Germany.” He worried about overstepping “the red line between monetary policy and budgetary policy” and said, “Governments must take on their responsibilities and not subcontract them out to monetary policy.”
Aiming squarely at Paul Krugman, he said, “In the US, certain people believe that the ECB should buy more sovereign debt like the American Federal Reserve. But we’re not a federal state, and the Fed doesn’t buy the debt of California or Florida.” And he vetoed in advance any new Long Term Refinancing Operations (LTRO) through which the ECB late last year and earlier this year had lent banks €1 trillion for three years at 1%. “Like morphine, they relieve the pain but don’t cure the disease,” he said. “And there are side effects, such as delaying the reform of the banking sector.”
Would you like to be notified via email when WOLF STREET publishes a new article? Sign up here.