March 12, 2015 / 12:15 PM / 3 years ago

REFILE-UPDATE 2-German, Dutch central bankers take aim at France over deficit

(Refiles to correct Knot said “misalignment” twice in final quote; adds “by 2017” in third paragraph)

By Toby Sterling

AMSTERDAM, March 12 (Reuters) - The Dutch and German central bank presidents on Thursday criticized the French government for running budget deficits for too long, and warned that the current low-interest rate environment may be lulling politicians into complacency.

The broadsides from the two closely-aligned Northern European bankers underline that while the European Central Bank’s bond-purchasing program has eased tension on financial markets, it has not removed underlying tensions between core Northern and Southern members of Europe’s monetary union.

Klaas Knot of De Nederlandsche Bank said that France is on track to break European budget rules in 14 out of 19 years of the euro’s existence by 2017.

“For each individual year you can try to come up with an explanation of an extraordinary severe recession or an extraordinary circumstance, but I think it is the accumulation of these exceptions which is undermining the rules,” he said at a press conference in Amsterdam.

The remarks follow a decision by European Union finance ministers this week to give France’s government two more years to bring its deficit below the 3 percent of GDP level specified by European rules.

In Frankfurt, Bundesbank President Jens Weidmann warned that the current low interest rates brought on by the ECB’s purchasing of government bonds are exceptional.

“Cheap government financing conditions should not cause governments to believe that further reforms are not needed,” Weidmann said.

“That goes not only for the countries affected by crises but also for big countries like France and Italy.”

The EU this week also elected not to start disciplinary steps against Italy, even though its debt, the second highest in Europe, is rising instead of falling as required by the rules.

Knot and Weidmann are both members of the ECB’s governing council who voted against the ECB’s two-year program of bond buying, or ‘quantitative easing’ launched this week. Knot said one of the main reasons he opposed the policy was the danger that artificially low rates will make it easier for governments to finance unsustainable spending.

Now “for a very long time there will be no market discipline, or very little market discipline, on governments,” he said.

Separately, he warned that ECB bond purchasing may be causing asset bubbles in high-yield bonds, government debt, particularly in Southern European countries, and stocks.

“In a while it will be harder to identify the sectors where there is no misalignment than to identify the sectors where there is misalignment, I‘m afraid,” he said. (Reporting By Toby Sterling and Maria Sheahan; Editing by Toby Chopra)

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