New German adviser says ECB pledge risks vital reforms

FRANKFURT Wed Feb 6, 2013 1:06pm GMT

Related Topics

FRANKFURT (Reuters) - The European Central Bank's promise to buy bonds of struggling euro zone states has eased pressure on them to reform, Germany's next "wise man" Volker Wieland said, which could prolong the bloc's debt crisis.

Wieland, an economics professor at Frankfurt's Goethe University who will succeed Wolfgang Franz on the German government's panel of economic advisers in March, also said the ECB's new banking supervisory role could harm monetary policy.

The ECB's announcement in September of a new and potentially unlimited programme of bond purchases to assist euro zone states seeking aid has helped slash Spanish and Italian borrowing costs from critical levels and stabilise financial markets.

The Wieland said it had led some countries to delay steps needed to secure their long term debt sustainability and end the three-year-old debt crisis, even though the ECB has yet to buy any bonds under the Outright Monetary Transactions (OMT) scheme.

"National governments have made great progress under market pressure, deficits were reduced and important reforms got on the way. But without the pressure it didn't work in the past and it would be fatal now to take the pressure off," Wieland told Reuters in an interview at the university on Tuesday.

"The fact that banks are lending to each other again does not mean the crisis is over. This is a fiscal crisis. Whether or not it can be overcome depends on whether countries can and want to service their debt and convince markets."

Banks have started to repay early some of the crisis loans they took from the ECB about a year ago, indicating that regional lenders are in better shape than some had feared, which has pushed up the euro as well as bank-to-bank lending rates.

"The euro zone would be better off without the OMT," Wieland said, adding that the new programme also blurred the lines between monetary and fiscal policy and could become a problem for the central bank by roping it into government financing.

Countries must comply with strict bailout rules before the ECB will consider buying their bonds, but these rules are set by euro zone governments for whom it is easier to let the ECB take care of financing than make tough reforms, Wieland added.

MORE TRANSPARENCY

To overcome the debt crisis, governments have agreed to push for closer integration of the euro zone's financial and banking system, and the ECB will become the bloc's single banking supervisor from March next year.

This first step towards a banking union was widely applauded, but Wieland said the potential for conflict between monetary policy and banking supervision meant euro zone governments should consider splitting the tasks again.

"A review clause would make sense," Wieland said. "That way, one can assess in two or three years time whether supervision and monetary policy should not operate separately after all."

The central bank could also bolster its credibility by making public its discussions and decisions - including publishing details of how individual policymakers voted on monetary policy, as the Federal Reserve and Bank of England do.

"It would do itself a big favour," Wieland said, adding that minutes of Governing Council meetings should be made available promptly and transcripts after a few years.

"The ECB's reasoning and actions would then at least historically be fully comprehensible," he added.

"The ECB would be more credible that way and it could already today counter speculation more effectively that its actions were not about preserving price stability in the euro zone overall, but about funding advantages for individual countries," Wieland said.

(Editing by Catherine Evans)

FILED UNDER: