April 28, 2015 / 5:41 PM / 5 years ago

Bundesbank head - euro state insolvency possible without system collapsing

FRANKFURT (Reuters) - The head of Germany’s Bundesbank criticised Greece’s government on Tuesday for failing to implement reforms and said it was possible for a country within the currency union to become insolvent.

German Bundesbank President Jens Weidmann speaks at a news conference at the end of an informal meeting of Ministers for Economic and Financial Affairs (ECOFIN) in Riga, Latvia, April 25, 2015. REUTERS/Ints Kalnins

“Member states must take responsibility for the consequences of their political decisions,” Jens Weidmann, also a member of the European Central Bank’s Governing Council, told an audience in Essen. “There must be a match between control and liability.”

“Ultimately, this requires the possibility of a state insolvency, without the financial system collapsing,” he said in the text of his speech.

Answering a question about the possibility of Greece leaving the euro, he said the currency union had become more resilient to economic shocks than before the financial crisis, “meaning these types of contagion effects (would be) reduced”.

Weidmann’s remarks in Germany’s industrial heartland reflected misgivings among its policymakers about Greece’s deteriorating finances and the unorthodox policies adopted by its leftist government.

“It is decisive that a functioning administration is established in Greece to move the economy and the state’s finances onto a sustainable course and, most importantly, that trust is built in a reliable course of reform,” he said in his speech.

The government of Alexis Tsipras “has again thwarted early hopes that this will happen,” Weidmann said.

Tsipras, elected in January on an anti-austerity ticket, has said he is confident of reaching an outline deal with international creditors within two weeks, after shaking up his negotiating team and sidelining his finance minister.

Tsipras threatened, however, to call a referendum if Greece’s international lenders insisted on demands deemed unacceptable by his government, a move the head of euro zone finance ministers said there was no time for.

Turning to France, Weidmann said the euro zone’s second biggest economy after Germany had a particular responsibility to put its public finances in order after repeatedly missing deficit targets.

“A currency union... can only reach stability when its member states run solid budgets... France is an important role model in this regard,” he said.

Last month, the European Union gave France two extra years until 2017 to cut its budget deficit to within prescribed limits, extending the deadline for the third time since 2009.

Reporting by John O'Donnell and John Stonestreet; Editing by Ruth Pitchford

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