The euro-zone’s debt crisis can’t be solved by creating ever-larger rescue funds or printing money to finance government debt, a board member of Germany’s central bank warned Tuesday: “financing government debt through the central bank’s printing press solves no problems but rather creates new ones,” said Andreas Dombret of the Bundesbank. Such a move would “endanger the most important foundation of a stable currency: the independence of a central bank that targets price stability”.
Several European governments have urged the European Central Bank to greatly increase its government bond purchases, and perhaps mimic the U.S. and U.K. central banks in printing money to finance government debt, to end the bloc’s deepening debt crisis. In response, ECB officials have argued repeatedly that its bond purchases are only temporary and limited.
Dombret also warned Tuesday that “ever larger rescue funds” wouldn’t solve the debt crisis either.
The warning comes after euro-zone finance ministers confirmed plans Monday to contribute EUR150 billion in additional bilateral loans to the International Monetary Fund as part of a move to boost its resources for crisis response. A representative for the Bundesbank said Monday the central bank is still in talks with the German government over IMF loans, and sees no urgency in that regard.
“Confidence cannot be bought with money”, Dombret said Tuesday. Instead, the euro-zone’s rescue funds can only buy time for states to consolidate their budgets, implement structural reforms to boost competitiveness and create a new architecture for the currency union, he said.
Dombret praised the “encouraging” results of this month’s European Union summit, including plans to introduce “debt brakes” into national law and create automatic sanctions for fiscal sinners.
But while the summit was a “correct first step,” Dombret warned its decisions must be implemented in full and not watered down.
The summit was only a small step towards deeper European integration, he added. Since the decisions don’t allow euro-zone states to intervene in the national budgets of fiscal sinners, any move to create common euro-zone bonds would share liability while leaving decisions on debt at a national level, he said.
Dombret warned that the debt crisis has reached the core of the euro zone, and poses the biggest risk for Germany’s economy and financial system. Sovereign debt, including that on banks’ books, has become a “significant risk for financial stability,” he said.
Last month’s disappointing German government debt auction was a “warning shot,” although it shouldn’t be over interpreted, he added.
Still, Germany’s domestic economy remains robust, and a recovery in the overall economy is likely during the course of next year, he said.
Turning to credit ratings agencies, Dombret said the timing of their decisions is often “questionable” and regulatory reliance on ratings should be reduced. However, special rules for government debt ratings don’t seem particularly useful, he said.
EasyForexNews Research Team