ESCHBORN, Germany (MNI) – It is not only by reducing national
deficits and bolstering growth through structural reforms that the
Eurozone debt crisis can be overcome, ECB Governing Council member Jens
Weidmann reiterated Tuesday.

Since the primary cause of the current economic uncertainty is lack
of confidence in the sustainability of public finances and insufficient
competitiveness, “ever larger safety nets alone will not solve the
crisis,” the president of the Bundesbank said in his prepared New Year’s
greetings to the German stock exchange.

“Financial aid alone has no impact on the real causes of the
crisis,” Weidmann insisted. At best, it buys time, he said. At worst, it
may weaken the pressure on bailout countries for needed budget
consolidation and structural reforms.

Greece, for example, has repeatedly fallen short of its deficit and
reform objectives, “and it remains to be seen whether a new, credible
program will be agreed,” he said.

By contrast, Ireland’s efforts to boost competitiveness have been
rewarded with declining borrowing rates, Weidmann observed, adding that
the reform programs of Spain and Italy constitute “major steps” toward
stabilization.

While deficit reduction may dampen growth in the short term, “a
further loss of confidence triggered by inaction would no doubt weigh
more on growth than consolidation,” he warned. “Lost confidence can be
recaptured, but it is a laborious process.”

This year will be decisive for the Eurozone, the central banker
said, calling for a “paradigm change” in regard to debt.

Monetary policy must not be misused for fiscal policy goals, he
declared. “Any attempt to resolve the crisis by printing money would not
be compatible with our mandate” since it would undermine the ECB’s
credibility and independence.

Weidmann set out five objectives for overcoming the crisis:

– “A clear and credible political commitment to solid public
finances.”

– A coherent framework for EMU that allows for greater cross-border
solidarity only if a correction of undesirable economic trends is
possible.

– Systemic risks posed by individual countries must be averted.

– The ECB’s price-stability mandate must be preserved. “There must
be no further pressure on monetary policy to take on risks and
redistribute them among member states,” he said.

– The financial system must be reinforced via bank recapitalization
and, over time, financial market reforms.

While recognizing that the “fiscal compact” agreed by European
leaders in December would be a step in the right direction if
implemented fully and swiftly, Weidmann pointed out that the new rules
still do allow for intervention in national budget policy.

“As long as the budget sovereignty of member states is preserved,
any increase in burden-sharing, not to mention eurobonds, cannot be
justified,” he said.

Moreover, bailout loans should carry a risk premium in order to
encourage governments to consolidate budgets, he argued.

Turning to Germany, Weidmann stressed that economic prospects
remain very uncertain and depend to a great extent on whether the debt
crisis can be overcome. He confirmed the Bundesbank’s forecasts for GDP
growth of 0.6% this year and 1.8% next year and dismissed the latest
projections of the IMF for growth of 0.3% and 1.5%, respectively, as
“too pessimistic”.

After stagnating in 1Q, the economy should gradually regain
momentum over the course of this year, “provided the crisis does not
intensify,” he said.

“Fundamentally, the German economy is in very good shape,” Weidmann
said. The financial situation of firms is better than before the
financial crisis and historically low unemployment should bolster
domestic growth as a counterweight to likely weaker exports.

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