In a talk at Harvard, German central bank governor Jens Weidmann warned against an overload of expectations on the European Central Bank for resolving the Euro crisis. Having recently opposed a decrease in the interest rate by the ECB, he said that a protracted period of low rates could lead to higher public expenditure and an undesirable situation whereby monetary policy becomes subordinate to government spending.
Weidmann started by referring to economics as moral philosophy, and used his sense of irony to declare himself a Keynesian philosopher for the purpose of the discussion.
Who are the sinners and saints in the Eurozone crisis so far? Weidmann mentioned reckless banks that now depend on ECB liquidity lifelines; wasteful states such as Greece; Germany ignoring the EU’s deficit rules in 2003; and interestingly, governments in the Eurozone who do not have a programme monitored by a Troika and thus do not feel real pressure to reform. In an attempt to raise the pressure, the Bundesbank president proposed to put a cap on how much sovereign debt banks can hold, which would be a more effective government debt brake than fiscal rules applied too leniently by the European Commission in his view.
Other sinners are wage earners in countries such as Portugal and Spain Continue reading