Bundesbank Chief Warns About Lack of European Reform

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.

via MarketNews

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza