European Central Bank Governing Council member Jens Weidmann said Wednesday that the European Union was stronger as a result of Britain’s membership and that the single market was its most important catalyst for growth.
In prepared remarks for a speech in London to the annual dinner of the German-British Chamber of Industry and Commerce that contained no references to current monetary policy, the Bundesbank president also reiterated his views on the treatment of sovereign debt on bank balance sheets and the need for for fiscal integration around the Eurozone.
“The EU is stronger today because of Britain’s contribution to it, Weidmann said. “The European economy is more open and dynamic as a result of Britain’s commitment to open and flexible markets – a position very much in tune with the Bundesbank’s, I might add.”
“And that commitment to open and flexible markets holds the promise of even bigger returns. A lot of the potential inherent in our most important European catalyst for growth, the single market, is still untapped.”
Addressing the issue of what he called “deficit bias”, Weidmann said it was important that Eurozone member states acted in a fiscally responsible manner given that there was no option for mutualising public debt.
“Just as overfishing creates negative externalities for other countries, excessive public debt harms the euro area as a whole,” he said. “Excessive debt in one member state drives up longer-term interest rates for all euro-area countries.”
In remarks that largely repeated those he made last week in Madrid, Weidmann said given the issue of sovereign debt and the risks associated with weak public finances and the potential need for restructuring it was vitally important that investors shoulder the bulk of the risk “since they are the ones who reap the return when things go well.”
“The introduction of collective action clauses in sovereign bonds was a first step in that direction. But more steps are needed,” he said. “The Bundesbank has put forward a proposal for sovereign bonds to include an automatic maturity extension of three years in case a sovereign needs to make use of the European rescue mechanisms.”
“This automatic maturity extension would allow the sovereign in question to tackle its fiscal challenges while preventing investors from bolting,” he continued. “The amount of official financial support would be reduced, and time could be bought to figure out if the problem is one of temporary illiquidity or insolvency.”
Weidmann also again advanced the argument for a change in the risk-free accounting treatment of sovereign bonds on bank balance sheets.
“Sovereign exposures are privileged by low or zero capital requirements,” he said. “An adequate risk-weighting of sovereign bonds would make banks more resilient if the fiscal position of the respective sovereign were to deteriorate. And it would bring spreads more into line with the underlying risk, thus sending a disciplining signal to the sovereign.”