A Comprehensive Interview with the ECB Dissenter
Jens Weidmann, president of the German Bundesbank, is well-known for his disdain of the ECB’s unconventional policy measures. He continues to believe that the way forward does not require ever looser monetary policy, but economic reform. On these points we tend to agree with him; however, just as other central bankers, he of course supports the nonsensical ECB “price stability targetâ€.
Needless to say, if the money issued by the central bank were to lose 2% of its purchasing power every year as planned, we would say that this would not represent price stability by any stretch of the imagination. However, we are actually not really critical of the precise “target†of the policy, but of the entire concept as such. It is a dangerous concept even if it were to target 0% price inflation. It has produced untold mischief over the past century, mainly in the form of major booms and busts (we have detailed the problems in “The Errors and Dangers of the Price Stability Policyâ€).
Anyway, Weidmann has recently given an interview to German news magazine Der Spiegel, which is well worth reading in its entirety. Weidmann evidently does not trust the calm in the financial markets and definitely does not believe that the euro area crisis is over and done with just because sovereign bond yields have declined a lot. Below are excerpts containing the parts we found most interesting:
“SPIEGEL: Mr. Weidmann, you are notorious for being a tough critic of European Central Bank President Mario Draghi. But the euro crisis seems to be over, largely thanks to ECB intervention. Has he not been proven right?
Weidmann: It’s not about being right or a personal confrontation. When it comes to extremely important monetary policy decisions, the ECB Governing Council does its utmost to find the correct path. And the decisions are so difficult because the crisis is not yet behind us, even if the current calm on the financial markets might suggest as much.
SPIEGEL: Yet Spain, once wracked by the euro-zone crisis, can today borrow money more cheaply than ever before in the history of the monetary union. Do you not think that is a consequence of Mario Draghi’s 2012 pledge to save the euro “whatever it takes�
Weidmann:You shouldn’t mistake the thermometer for the illness. I have never disputed that the ECB could impress and move the markets with the announcement that it would make massive purchases of sovereign bonds if necessary. But such measures focus on the symptoms and don’t cure the causes of the crisis. As such, the current calm is misleading and even dangerous, because it takes pressure off of the governments to implement badly needed reforms. If they are not undertaken, investors could quickly change their risk evaluations.
SPIEGEL: But if the ECB hadn’t intervened, the euro zone patient may well have died from its 2012 fever.
Weidmann: I don’t believe that is the case. In reaction to the crisis, policymakers established a multibillion euro bailout fund to assist the crisis countries in exchange for their adherence to certain stipulations. That was the correct, democratically legitimate path. Even more so given that the bailout fund can also purchase sovereign bonds. The central bank in the euro zone, by contrast, is forbidden from providing credit to countries and from purchasing sovereign bonds on the primary market. By making targeted bond purchases on the secondary market, the ECB opened itself to accusations of skirting this ban.
SPIEGEL:Â Since the beginning of the financial crisis, the European Central Bank has injected liquidity into the markets at decreasing intervals. It is a bit reminiscent of a junkie who has to continually up the dosage to have the desired effect.
Weidmann:It is certainly true that after each loosening of monetary policy, the public immediately begins speculating about what might come next.
