–ECB Bond Buying Plan Amounts To Linking Fiscal And Monetary Policy

FRANKFURT (MNI) – Eurozone inflation remains under control for now,
but the European Central Bank risks losing sight of its price stability
goal if it engages in more sovereign bond buying, ECB Governing Council
member Jens Weidmann said in an interview with German magazine Der
Spiegel published on Sunday.

Price stability would also be put in question if the ECB is
expected to keep the Eurozone together at “any price,” Weidmann said.
While not specifically referring to Greece, he argued the central bank
should not stand in the way of a member exiting the Eurozone if the EU
chooses to limit rescue aid.

Weidmann, who heads Germany’s Bundesbank, also said making ECB bond
buys conditional on a country getting aid from the ESM rescue fund
inappropriately links monetary and fiscal policies. He repeated his
general opposition to bond buying, which “comes too close to state
financing through printing money.”

The latest proposal for the ECB to intervene by setting an
effective cap on sovereign bond yields is also a “precarious prospect,”
Weidmann said, insisting he was not the only person who gets “stomach
pains” at the thought.

He rejected the suggestion that ECB bond buys could be a temporary
measure – “this door would be very hard to close again” – and instead
said it would “awaken long-running desires and lead to a
collectivization of risks.”

At the same time, Weidmann said he agreed with ECB Executive Board
member Joerg Asmussen that there should be “no doubt” about the euro’s
long-term viability as a stable currency. But he said it was up to
European politicians to take the necessary steps toward more political
integration and to decide which countries belonged in the bloc.

Weidmann praised the efforts of Ireland, Portugal, Spain and Italy
to put their finances in order.

On Greece, he said, “let us first wait for the Troika report,”
though he warned politicians not to allow “further credibility damage”
to the Eurozone’s framework or the bailout programs.

Weidmann said the ECB was running the risk of losing sight of its
core mandate by being pulled too far into the political sphere. he said
his goal was to prevent monetary policy from falling under the
“dominance” of fiscal policy.

“I too see no immediate inflationary danger. But when monetary
policy allows itself to be roped in as a comprehensive political problem
solver, its actual goal threatens to fall more and more into the
background,” Weidmann cautioned.

“It has been proven over time that a central bank is independent of
fiscal policy and does not finance government budgets. These principles
are not ends in themselves; they should prevent a central bank from
running into the danger of neglecting its primary task: maintaining
price stability,” he argued.

Weidmann said this mandate was equally under threat if the ECB were
held responsible for keeping the Eurozone together.

“If the central bank were called on to guarantee that members
remain in the Eurozone at any price, then this could bring it into
conflict with its most important task, maintaining stable prices,” he
said.

As a result, should politicians decide to limit aid to members not
meeting their responsibilities, “the central bank should not stand in
the way, for example by replacing the outstanding rescue funds,” he
added.

Weidmann said it is the responsibility of politicians to dictate
the Eurozone’s membership.

“I am in full agreement with Joerg Asmussen that no doubt should be
allowed to creep in about the character of the euro as a stable
currency, and therefore over its continued existence,” Weidmann said.

But “it is the task of national and European politics to dictate
the composition of the monetary union. It was governments, not the
central banks, that decided which countries could enter the monetary
union.”

Weidmann said Ireland and Portugal had achieved “impressive
progress” with their reforms, while he also rated as “positive” the
steps taken in Italy and Spain.

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

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