PARIS (MNI) – Central bank bond buying can blur the line between fiscal and monetary policy and lead to pressure to maintain an accommodative policy stance longer than required for price stability, European Central Bank Governing Council member Jens Weidmann said Wednesday.
“In a currency union like the European one, with a single monetary policy but national economic and fiscal policies, sovereign bond purchases blur those all-important boundaries between monetary and fiscal policy,” Weidmann told a conference in Frankfurt.
“At the end of the day, this can lead to political pressure being exerted on the Eurosystem to maintain the very accommodative monetary policy for longer than appropriate from a price stability standpoint,” he added.
Weidmann, who heads the German Bundesbank, also called for regulatory changes to require banks to hold capital against their government bond portfolios and was also critical of a European Commission proposal to create a so-called European safe bond.
“Not until banks have begun to hold sufficient capital against government bonds and the size of individual exposures has been limited, will banks be able to effectively cope with the process of restructuring sovereign debt,” Weidmann said.
The Bundesbank president said that a safe bond, which would pool sovereign debt into a new synthetic instrument, “could be perceived as a stepping stone towards full-blown Eurobonds, i.e. mutual liability.”
“To avoid that perception, European safe bonds would have to be constructed by market participants,” he said.
WEDNESDAY, JUNE 14, 2017 – 05:01