“If governments can expect to be bailed out by central banks, chances are that they will adjust their behavior accordingly.”
That remark was made by Jenns Weidmann, a European Central Bank Governing Council member, at a speech to a Harvard University audience, according to a Reuters report on Monday.
He’s right, of course. During the 2008 global financial crisis and the sovereign debt crisis in Europe a few years later, central banks have been instrumental in rescuing economies from flat-lining.
For the most part, governments in industrial nations have lagged in their responses to the recent crises. European national governments have been especially guilty as they frequently and openly bickered on what steps to take.
It was up to ECB President Mario Draghi to declare that the ECB would do “whatever it takes to preserve the euro,” which prevented the euro from imploding in financial markets.
In other words, while central banks were busy rescuing the global economy, governments got a free pass to delay much-needed structural reforms.
Even now, many governments have not used the extra time to implement any meaningful reforms, which could improve their response when the next crisis comes along.
Nevertheless, the comment by Weidmann, who is also the Bundesbank president, suggests that after the Federal Reserve, it’s the turn of European Central Bank officials to speak with forked tongues.
While the ECB’s chief economist, Peter Praet, has warned of deflationary pressures and the possibility of implementing unconventional monetary stimulus measures (quantitative easing, negative rates on excess commercial bank deposits held with the central bank, etc.) to fend off the threat, the Germans are openly expressing their disapproval of any further stimulus from the central bank.
Last week, Weidmann noted that “the money printer is definitely not the way to solve it. It will still take years until the causes of the crisis are eliminated.”
Apart from Weidmann, German Finance Minister Wolfgang Schauble said late last week, that “monetary policy cannot create sustainable growth, it can buy time for reforms, but it cannot solve the fundamental problems,” adding that “there is the danger that this monetary policy, in addition to all good arguments, is understood in some European countries as a false incentive, not to deploy necessary reforms”.
With the Germans being heavy-hitters in the ECB, it will be tricky for Europe’s central bank to push through unconventional easing measures.
Given the political wrangling that will accompany any decision to implement quantitative easing, most bets are on the ECB first opting for cutting the benchmark interest rate further and/or lowering the rate on excess deposits with the central bank to below zero percent (negative interest rates).