The idea that central banks can address a wide range of problems by opening up the monetary policy spigot is dangerous, European Central Bank Governing Council member Jens Weidmann said Monday.
Speaking in Munich, Weidmann sought to downplay the outcome of Sunday’s Italian referendum, while expressing concern about the implication for further reform, according to a text provided by the Bundesbank, which he heads.
“The notion that central banks could counter with cheap money the causes of financial and sovereign debt crises, of globalization fears or of rising populism is dangerous,” he said.
A central bank that consistently compensates for policy deficiencies elsewhere risks its independence, he said.
“And that loose monetary policy buys politicians time, is at best a side-effect, but mustn’t be the goal of monetary policy decisions,” he added.
The duration of a monetary policy stance has to depend solely on the requirements of price stability, he demanded.
“My colleagues on the ECB Governing Council would with certainty express that very similarly,” he added.
Although the Italian electorate’s rejection of constitutional reform yesterday is “certainly not the end of the world”, Weidmann said it gives rise to the concern that the pace of reforms in the country will slow.
That would be a troubling development for Italy and beyond, he said, pointing to weak Italian growth, high government debt and an elevated level of nonperforming loans in the country’s banking system.
Weidmann dedicated most of his speech to an ardent defense of fiscal probity, which he called “a central precondition for a stable currency and a stable currency union.”
Every Eurozone member country must ensure the solidity of its own finances, its competitiveness and economic prosperity, he noted.
That includes Germany, where the long-term growth outlook is not so rosy as to warrant satisfaction, he said.