Frankfurt: The European Central Bank’s plan for a new programme to buy government bonds of struggling Eurozone members risks becoming “addictive like a drug”, Bundesbank chief Jens Weidmann said in a magazine interview released on Sunday.
The ECB is being forced to take a greater role in fighting the Eurozone crisis while the bloc’s governments negotiate legal and political hurdles to coordinating a longer-term response, but the Bundesbank wants to limit central bank action.
ECB President Mario Draghi is expected to detail the bond-buying plan after a September 6 meeting of the bank’s 23-member Governing Council. Draghi said after the last policy meeting on August 2 that Weidmann had reservations about the plan.
“Such a policy is for me close to state financing via the printing press,” Weidmann told Germany’s Der Spiegel. “In democracies, it is parliaments and not central banks that should decide on such a comprehensive pooling of risks.”
Financing governments has been a taboo for the ECB. Weidmann’s predecessor as Bundesbank chief, Axel Weber, quit last year in protest at the ECB’s existing, but now dormant, bond-buy plan — the Securities Markets Programme (SMP).
“We should not underestimate the risk that central bank financing can become addictive like a drug,” Weidmann said.
The Bundesbank retains substantial influence within Germany and on financial markets due to its inflation-fighting credentials but, as just one of 17 constituents at the ECB, it is unlikely it could scupper Draghi’s plan.
Policymakers are posturing over the programme ahead their September 6 meeting, at which markets will be looking for the central bank to spell out more details of the plan.
The ECB is considering setting yield band targets under a the new bond-buying programme to allow it to keep its strategy shielded and avoid speculators trying to cash in, central bank sources told Reuters on Friday.
ECB dispute
Der Spiegel also reported that there was a dispute within the ECB over the form of the programme, with officials from countries like Spain and Italy pushing for unlimited ECB intervention in secondary bond markets.
ECB officials from northern Eurozone countries only want the central bank to intervene in a “short, but energetic” way when bond yields “explode” upwards, the magazine said.
Germany’s Finance Ministry is concerned the new ECB plan could endanger the bank’s independence, Der Spiegel said.
As a condition for ECB support, a country will first have to seek an aid programme from the Eurozone’s bailout funds. This is subject to approval by finance ministers, and central bankers are worried this makes their action dependent on politicians.
To avert this risk, German finance ministry officials were exploring an option where Spain or Italy would make a commitment on economic reforms to the European Commission — an unelected body — as a condition for ECB support, rather than accepting an aid programme from the bailout funds, Der Spiegel said.
That option would avert the problem of ECB action being linked to decisions taken by governments, thereby protecting the central bank’s independence. However, such a commitment to the Commission would be less binding than the terms of a bailout.
Weidmann wanted to “avoid monetary policy coming under the dominance of fiscal policy.”
He did not see an immediate inflation threat from the new bond-buying programme, but added: “If monetary policy allows itself to become a comprehensive political problem solver, its real goal risks moving further and further into the background.”
Weidmann warned against obligating the ECB “to guarantee keeping member states in the Eurozone at any price.”
On Greece’s position in the bloc, he said it was important that “no further damage to trust in the framework of the currency union arises, and that the economic policy requirements of the aid programme retain their credibility.”
