Outgoing Bundesbank head warns EU periphery

Outgoing Bundesbank president Axel Weber has impressed upon Europe’s indebted nations the need to repair their own houses and not rely on Berlin’s support too far.

Writing in the Financial Times today, he said support should come from the European stability mechanism only when the stability of the whole Eurozone is at risk, and even then at “non-concessional rates only, and conditional on a tough adjustment programme”.

Such support should not deter recipients from introducing “sustainable economic policy”, nor should it expose taxpayers in other countries to “undue risks”.

Weber said some proposals to broaden the ESM’s scope entailed “a weakening of the responsibility of financial market participants and member states, diminished incentives for sound fiscal policies, and a shifting of risks to the taxpayers of other member states”.

Rates on ESM loans should not be significantly softer than conditions under the European Financial Stability Facility, he argued.

Attaching weaker conditions risked “introducing Eurobonds more or less through the back door”.

He said buying bonds on secondary markets would hit “significant operational governance problems regarding their volume, timing and conditions. Second, given the direct support of the ESM, member states in distress would already be protected from high market interest rates”.

Weber said secondary market purchases were also an inefficient method of stabilising bond prices and markets.

“Secondary market purchases combined with the well-justified and necessary preferred-creditor status of ESM loans might even jeopardise financial market stability as the risks of the remaining private bondholders would increase sharply,” he said.

It behooves EU nations not to require support in the first place, he added.
“Principles of subsidiarity, responsibility of individual member countries and no-bail-out remain essential for the EU.”

Financial support should be a “supplement” adequate to “buy some time and smooth this process,” he added.

Weber advocated “correct incentives for stability-oriented policies” to prevent future crises; improvements in market regulation to bolster against shocks; and a “resolution mechanism which does not diminish individual responsibility of member states” when crises inevitably recur.

David Walker

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