FRANKFURT (MNI) – Eurozone leaders must not water down the region’s
new fiscal compact and should not expect the European Central Bank to
step up buying of government bonds as an easy way out of the debt
crisis, ECB Governing Council member Jens Weidmann said Wednesday.

Weidmann said that while it was too early for a final assessment,
there were indications that policy-makers are already watering down new,
tougher fiscal rules for the Eurozone.

“Preliminary results that have seeped through to the public don’t
make me very optimistic. There are clear signs of tendancies towards
watering down” previous considerations, he said. “Most recently the ECB,
which is involved in negotiations, voiced clear criticism.”

In a speech text provided by the Bundesbank, Weidmann reminded that
more automatic and binding rules has been promised. In addition, any
European aid payments should be linked to strict adherence to rules, he
said.

Weidmann also reiterated his strict opposition to Eurobonds in the
current Eurozone framework and to any massive expansion of the ECB’s
government bond-buying program SMP.

The current EU treaty’s prohibition of monetary financing make such
a policy illegal, Weidmann argued: “Can you overcome a confidence crisis
by ignoring the law? How will you secure trust in future rules?”

In the context of monetary union, unlimited ECB bond buys would
blur the border between monetary and fiscal policy and could quickly
undermine the central bank’s independence and its ability to ensure
price stability, Weidmann said.

Weidmann also sounded a cautious note on the central bank’s recent
massive liquidity injection coupled with a reduction of the reserve
requirements and looser collateral rules.

“Naturally, as a result, the risks associated with liquidity
provision have risen. We must ensure that a balance will be kept.
Monetary policy must not lose sight of its job of ensuring price
stability by taking on excessive risks or acting outside its mandate,”
Weidmann said.

Weidmann’s concerns may already be reflected in policies of the
ECB, which decided in December to keep some new collateral rules at the
national central bank level, implying that any possible risk would also
be carried by the national central banks and not by the Eurosystem as a
whole.

The head of the Bundesbank said that Germany for its part does not
have to fear a credit crunch. Even if there may be some deleveraging as
a result of new capital requirements for banks, “fear of a broad credit
crunch in Germany are unfounded,” he said.

Weidmann also reiterated the Bundesbank’s growth projections that
sees GDP growth recovering from a flat first quarter to produce a 0.6%
gain for the full year. In 2013, Germany is expected to grow by 1.8%,
Weidmann said.

Weidmann warned, however, that forecasts are subject to
particularly high uncertainty and the assumption of no further
exacerbation of the debt crisis.

–Frankfurt bureau tel.: +49-69-720142. Email: jtreeck@marketnews.com

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