The European Central Bank (ECB) alone can’t solve the Eurozone crisis, according to Germany’s central bank, Bundesbank, chief Jens Weidmann.
The ECB chief was addressing an economists’ conference in Aix-en-Provence. His comments are construed pointing to the bloc’s governments, as an urge to initiate action to strengthen their fiscal prudence and bring the economy back into shape.
Jens Weidmann’s comments come soon after European Central Bank president Mario Draghi and new Governor of Bank of England Mark Carney signaled last week that interest rates would remain low for years to come in a coordinated push to drive growth.
Many consider recent remarks from Mario Draghi are a break from ECB’s tradition of not pre-committing on policy.
ECB Monetary Policy has Done a Lot
Bundesbank chief Jens Weidmann remarked: “Monetary policy has already done a lot to absorb the economic consequences of the crisis, but it cannot solve the crisis.”
Jens Weidmann, considered a more hawkish member among the 23-member Governing Council of ECB, indicated the Eurozone crisis highlighted structural deficiencies that require structural solutions.
No Guarantee on Banks and Bonds
Pointing out the need to strengthen Europe’s fiscal rules, the Budesbank chief proposed abolition of implicit guarantees for banks and government bonds.
According to a recent report by Tom Braithwaite and Patrick Jenkins in Financial Times, a sharp increase in bond yields would threaten recovery in the balance sheets of global banks.
The Budesbank chief cautioned sovereign default is possible without bringing down the financial system.
Delink Banks and Sovereign Governments
Jens Weidmann called for severance of close links between banks and sovereign governments. He felt European banks hold excessively large amount of government bonds.
He felt banks are encouraged to hold greater exposure to government bonds as such banks carry zero risk weightings.
Recently, FDIC’s vice chairman Thomas Hoening felt risk measurement rules for banks under Basel III don’t do much to reduce the size of the riskiest banks. He remarked that Germany’s largest bank, Deutsche Bank, is poorly capitalized from a leverage ratio perspective.