Friday, 2 December 2011

German Bank Chief Sticks to Hard Line on Euro Support

FRANKFURT — The president of Germany’s powerful central bank reiterated his opposition to massive bond purchases Friday, potentially undercutting expectations that the European Central Bank is preparing to intervene more forcefully in financial markets.

“I don’t believe that the euro would be stabilized over the long term by ignoring constitutions and treaties,” Jens Weidmann, president of the Bundesbank, said in an interview. “The central bank is forbidden from redistributing debt obligations in massive amounts among the euro-zone countries.”

Mr. Weidmann spoke a day after Mario Draghi, the president of the E.C.B., made comments that were widely interpreted as opening the door at least a crack to a European version of quantitative easing — massive purchases of government bonds to stimulate bank lending and growth.

In a speech to European Parliament members on Thursday, Mr. Draghi called for a “new fiscal compact” among euro nations, and suggested that if one materialized the E.C.B. might be willing to take additional steps.

Mr. Weidmann declined Friday to comment directly on Mr. Draghi’s remarks. But he said he does not believe his opinions are far apart from those of the E.C.B. president. If so, that raises the question of whether Mr. Draghi in fact meant to signal bolder intervention in financial markets. In any case, Mr. Draghi would certainly think hard before effectively printing money without support from Europe’s largest economy.

“Financing nations by printing money is absolutely incompatible with a monetary policy that guarantees price stability,” Mr. Weidmann said. By law, the European Central Bank is supposed to make price stability its overriding priority.

Mr. Weidmann has only one vote on the E.C.B.’s 23-member governing council, but its members are extremely conscious of the need to maintain the consent and trust of euro-area citizens. Mr. Weidmann’s views are widely shared in Germany, including by Chancellor Angela Merkel. Mr. Weidmann, 43, served as her economic advisor before becoming Bundesbank president in May.

On Friday, Mrs. Merkel reiterated her support for stronger fiscal cooperation across the euro zone, in line with the measures Mr. Draghi and Mr. Weidmann have called for. Speaking to the German parliament, she called for a “union of stability” able to enforce controls on individual European economies.

“Where we today have agreements, we need in the future to have legally binding regulations,” she said. European leaders are scheduled to meet next Friday, though it is unclear whether they will be able to reach agreement on tighter rules.

In his comments Thursday, Mr. Draghi never explicitly promised to widen the E.C.B.’s intervention in bond markets, and he may have had other measures in mind. The E.C.B. has other tools at its disposal that would not meet opposition from the Bundesbank. For example, when the E.C.B. meets next Thursday, it is expected to broaden its support to euro-area banks by offering them unlimited, low-interest loans for as long as three years.

So far the maximum lending period has been 13 months. Longer loans would help banks that have had trouble raising funds on the open market by issuing their own bonds. That is a typical way that banks raise money to lend on to customers, but bond issuance has plummeted because investors have become uneasy about the health of euro-area institutions.

Two or three-year E.C.B. loans would also help banks that have longer-term obligations that must be continually refinanced.

The E.C.B. demands collateral in return for the loans, but accepts securities that have lost value on the open market, including bonds from Greece. Defenders of the bank argue that its liberal collateral policy already amounts to a form of quantitative easing, because it allows institutions to convert devalued paper into cash that can be lent to customers.

As he has before, Mr. Weidmann said that the solution to the crisis lies with governments, who must win back the trust of bond investors by addressing the shortcomings in the design of the euro zone. Countries must be willing to cede some control over their spending policy, he said, for example by agreeing to automatic tax increases if their budget deficits rise above limits agreed to by treaty.

If political leaders announce a credible plan this coming week, he said, “calm could quickly return to markets.”

Nicholas Kulish contributed reporting from Berlin