Weidmann Criticizes Commission (On the Role of the Central Banker)

December 4th, 2014
in Op Ed

by Dirk Ehnts, Econoblog101

The Wall Street Journal reports that Jens Weidmann, Germany's top central banker, has been voicing his concern regarding some structural reform policies of European nations:

Follow up:

"It should be clear that monetary policy can't solve structural problems in the euro area and also can't lift the growth potential sustainably," Mr. Weidmann said a meeting of Franco-German Financial and Economic Council in Berlin.

"For this, structural reforms and most of all a credible course in fiscal consolidation is crucial. Only four eurozone countries meet fiscal rules in their presented budget plans. And the EU commission has refrained from demanding more ambitious budget plans, even in cases of considerable bad planning," he said.

I might be old-fashioned, but I always thought that the European Central Bank's job is to watch the inflation rate and make sure it does not move too far from its target, which is now defined as a bit below two percent. October's inflation rate was 0.4%, which is clearly a failure. So, one would think we need more expansionary policies.

I cannot see why Jens Weidmann should comment on national policies that affect economic growth. Is this not outside of the territory, so to speak, of a central banker? On one side, European central bankers always stress that are "only" watching the inflation rate. Now, some wonder whether their monetary policy is enough to stabilize inflation. However, if you worry about too low inflation how can Mr Weidmann than argue for cutting government spending? That is a contractionary policy! As Paul Krugman has noted for Japan (and generalized), contractionary policies are contractionary. Weidmann, nevertheless, warns that 'government bond purchases harbour major moral hazard'. I can't see how. Outside of the euro zone, it is clear everywhere that there is default risk for government securities. This keeps yields down and economies out of depression.

The way that Mr Weidmann is acting - giving unwanted counsel to a democratically elected institution - at a time when the ECB is not able to hit its inflation target is a bit peculiar. It is downright odd when one considers that the German Bundesbank president argues for less expansionary fiscal policies and not more expansionary policies. The Bundesbank, of course, is politically independent, but Jens Weidmann was put in charge by German chancellor Angela Merkel. It seems to me that Mr Weidmann is giving political advice to the European Commission, and not technical advice. Politically, there might be a motive to argue for smaller government and workers wages to fall further. Technically, contractionary policies are definitely not what is needed in times of weak demand.

Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.

 navigate econintersect.com


Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day


Asia / Pacific
Middle East / Africa
USA Government

RSS Feeds / Social Media

Combined Econintersect Feed

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution



  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved