BERLIN (MNI) – European Central Bank Governing Council member Jens
Weidmann on Wednesday reaffirmed his criticism of the decisions by
Eurozone leaders on July 21 to address the debt crisis.

In the draft of a speech to be delivered at the American Council on
Germany in Washington, Weidmann criticized the decision to reduce
interest payments on the EU’s bailout loans to ailing Eurozone states,
sayiing it weakened the incentives for these countries to re-establish
sound public finances with fiscal and economic reforms.

He argued that the conditionality attached to the bailout packages
has been weakened by the recent decisions, which dilutes the underlying
principle of the European Monetary Union that each country must bear the
full consequences of its own fiscal policy.

“Contrary to what is actually needed in order to overcome the
sovereign debt crisis, we risk seeing the propensity for excessive
deficits rise even further in the future,” the Bundesbank president
warned.

“We will not be able to regain stability within EMU without
re-establishing the credibility of its framework,” he insisted. “A
fundamental political decision is therefore needed: either the existing
policy framework of EMU has to be changed fundamentally or the
incentives for sound fiscal policy have to be strengthened within the
existing framework.”

The first option would imply EMU member states abandoning a
substantial part of their national sovereignty over fiscal policy and
would therefore require fundamental legal changes on the European and
possibly also the national level, he explained.

The second option requires a return to the fundamental principles
of monetary union, with each member state bearing the consequences of
its own budget decisions, Weidmann said.

“Either option would be sustainable from an economic point of view.
However, combining elements of both options, ie sharing the risks of
unsound fiscal policy and retaining national sovereignty over fiscal
policy, is condemned to failure,” he cautioned.

“It would undermine the incentives for sound fiscal and economic
policy even further, thus achieving the opposite of stabilising monetary
union,” Weidmann asserted. “Ultimately, this approach would also not be
credible to financial markets as its inconsistencies raise doubts about
the public and political support.”

Turning to Germany, Weidmann observed that his country’s economic
outlook has been dampened by high overall uncertainty, especially
regarding further developments in the European sovereign debt crisis.

“But we expect economic activity to remain robust in the third
quarter, and even though expectations for the winter months are subject
to considerable risks, this should prove to be more of a soft patch,” he
said.

“Nevertheless, there is a heightened danger that financial market
turmoil could affect the real economy,” he cautioned. Thus, it is
crucial to find a prompt and coherent political answer to the sovereign
debt crisis in order to reduce downside risks, Weidmann said.

Germany’s persistent current account surpluses were not caused by
policy interventions aimed at boosting exports, the central banker said.
Instead, they resulted from market-driven adjustments to external
pressure as well as overdue structural reforms.

“It is true that the restructuring process has fostered the
emergence of current account surpluses by putting a strain on domestic
consumption. As the restructuring process was temporary, however, German
current account surpluses are not expected to reach pre-crisis levels
again soon,” he predicted.

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

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