LONDON (MNI) – There is only so much money that can be spent to
contain the current Eurozone debt crisis before financial and political
constraints are met, European Central Bank Governing Council Jens
Weidmann said, warning that new problems could emerge as a result of
policies being undertaken to counter the current situation.
“As [Bank of England Governor] Mervyn King frequently and rightly
states: ‘all we buy is time’ – time that must be used to address the
root causes of the crisis,” the head of the Bundesbank said in the text
of a speech delivered at an event here. “In any case, we must realise
that all the money we put on the table will not buy us a lasting
solution.”
Addressing the root causes of the ongoing crisis, Weidmann stressed
that “Europe has to be rebalanced.” While some have argued that both
countries with persistent current account deficits and surpluses have to
make changes, Weidmann stressed that it is the deficit states that need
to adjust.
“It is true that surplus countries have benefited through higher
exports,” Weidmann said. “But ultimately, it was the deficit countries
that operated an unsustainable model defined by a credit-fuelled boom in
domestic demand, and this model has to be reformed.”
“And we must acknowledge that surplus countries are already helping
to ease the burden of adjustment,” the Bundesbank chief added. “What are
the rescue packages other than publicly guaranteed interim loans to
facilitate the adjustment?”
A number of reforms have already been implemented, with “promising
results,” Weidmann noted. “But, despite these first steps, there is
still a long way to go,” he said.
Turning to the “central fear” of deflation, Weidmann conceded that
prices and wages would fall as fiscal and other economic adjustments
take place. “But we must not confuse such a one-time adjustment with
full-fledged deflation,” he added.
— Frankfurt bureau: +49 69 720 142; email: frankfurt@marketnews.com —
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