BERLIN (MNI) – European Central Bank Governing Council member Jens
Weidmann on Monday said the current short-term measures to fight the
Eurozone debt crisis are justifiable, but warned against changing the
overall framework of the monetary union.

In a statement prepared for delivery at a parliamentary hearing,
Bundesbank head Weidmann said the European Financial Stability Facility
(EFSF) and the aid program for Greece are “all in all justifiable, even
though they have weakened the incentives for solid public finances.”

Still, “the fundamental framework of the currency union should not
be altered,” Weidmann demanded. He insisted that the no-bailout
principle be preserved as a fundamental pillar of the currency union.

While Weidmann acknowledged that the fundamental targets of the
current EMU reform efforts were correct, namely better prevention and
crisis solution measures, he still warned that measures conceived so far
carry the risk that “the institutional framework will be increasingly
weakened.”

The Governing Council member called it “especially grave” that the
interest rates on the aid programs for highly indebted Eurozone states
have been lowered markedly. This will reduce the incentives for these
countries to return to solid public fiscal policies, he argued.

He also criticized the planned enhancement of the EFSF so that it
can buy bonds of highly indebted states on the secondary market. “Also
by these secondary market purchases the incentives for an appropriate
fiscal policy will be lowered,” he reasoned.

Commenting on further changes foreseen under the future European
Stability Mechanism (ESM), Weidmann reckoned that the planned Collective
Action Clauses in all new government bonds in the Eurozone from mid-2013
will not be sufficient.

Rather, there should also be an automatic lengthening of maturities
— for example by three years — in the case that a country needs to be
supported by the ESM, he said.

The Governing Council member once again stressed that Eurozone
countries that do not fulfill their obligations under the aid programs
should not receive further support and that a state insolvency should
thus not be ruled out.

“Against this backdrop, effective structures for bank restructuring
in all EU countries are of special urgency,” he stressed.

–Berlin bureau: +49-30-22 62 05 80; email: twidder@marketnews.com

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