9.2.2011
By Simon Miller
The president of the Deutsche Bundesbank Axel Weber has criticised members of the Eurozone as well as structural deficiencies in the monetary union for placing the Euro in danger.
Speaking at the Ragnar Nurkse lecture in Tallin yesterday, Weber said the financial crisis had “ruthlessly revealed” that certain countries failed to continue following the economic policies that made them fit to join the monetary union.
“The deficiencies include misguided policies in a number of member states, as well as structural shortcomings in the institutional framework of monetary union,” he said.
Weber pointed out that although it was right for developing countries to run up deficits, “deficit countries had not always used the inflowing capital in an efficient way”.
He added that despite a public deficit in one country boosting demand there, it also puts pressure on the interest rates in the whole monetary union, reducing economic growth in all member states.
“In extreme cases, such a free-rider policy not only puts pressure on the interest rates but might also affect the credibility and stability of the monetary union as a whole – as has been demonstrated by the debt crisis,” he continued.
Weber acknowledged the introduction of the Stability and Growth Pact (SGP) but pointed out that since its very inception the SGP had “been subject to political tactics which have greatly reduced its effectiveness”.
This, according to the president, reached its peak in 2005 when German and France insisted on a reform of the SGP that “softened the provisions of the Pact”.
He explained that as a result, the failure to consolidate budgets meant that when the financial crisis hot, a number of countries already had weak public finances and subsequent expenditures to support the financial system and the economy did not improve the situation.
Weber continued: “And when, in the spring of 2010, sovereign risk came to the fore, it turned into a major downside risk for recovery in Europe.”
Noting the work that had already gone into SGP strengthening, Webber warned: “However, the measures lack the ambition to fully redress past failings and to bring about a fundamental improvement.”
He added: “The major shortcoming of the envisaged reform is that relevant decisions on sanctions are still to be taken at a political level by the European Council. This leaves too much room for discretion in interpreting and applying the rules of the SGP.”
Weber also supported the need to enhance macroeconomic surveillance in the euro area but warned that this should not be used to coordinate or fine-tune macroeconomic policies.
He also said that the proposals for the European Stability Mechanism were strengthened by provisions that allow for a restructuring of private sector debt in case of insolvency.
“Faced with the prospect of losing money, financial markets should penalise unsound fiscal policies at an early stage and thus prevent the build-up of excessive deficits,” Weber added.
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