Bundesbank's Weidmann casts doubt on effectiveness of ECB's QE | Business News

Bundesbank’s Weidmann casts doubt on effectiveness of ECB’s QE

25 Jan 2015 | Author: | No comments yet »

Bundesbank’s Weidmann Didn’t Back ECB’s Bond-Buying Program.

FRANKFURT—German central-bank President Jens Weidmann didn’t vote in favor of the European Central Bank’s program to buy large amounts of bonds, according to excerpts of a newspaper interview to be published Sunday.After a long and valiant struggle, German hopes were finally extinguished that the ECB would change its monetary mind and come back to the Bundesbank way of thinking.

The majority decision by the ECB governing council to buy €1.14 trillion in sovereign bonds has been a a slap in the face for the German establishment. Maybe it is because I am German – and Bundesbank president Weidmann has always been one of the most outspoken opponents of QE – but I am skeptical that a QE program will do the work in Europe. It is thought that the stimulus will mutualize debt risks and finance troubled governments through the backdoor, which could potentially harm Germany’s relatively strong balance sheet. Weidmann is a member, on Thursday approved the plan to buy more than €1 trillion ($1.12 trillion) of debt securities, including government bonds, with newly created money. Lead by the Bundesbank, Germany’s political, media and business leaders had insisted they saw no looming deflationary threat to justify bond-buying.

Stephen Schwarzman, chairman of the Blackstone Group LP, said at the World Economic Forum in Davos: “One could argue that this type of approach Draghi is using should have been applied much earlier, which would have gotten Europe on a similar kind of platform the U.S. was on. It is never too late to do the right thing.” So today’s program amounts to a giant bailout in the form of a big fat central bank “bid” designed to prop up prices in the immense parking lot of French, Italian, Spanish, Portuguese etc. debt that has been accumulated by hedge funds, prop traders and other rank speculators since mid-2012.

The political pressure could increase on us to keep down the interest burdens on the finance ministers for a long time.” Behind the scenes at the Bundesbank officials say the ECB has, for short-term QE benefits, effectively pawned its political independence and made itself even more beholden to governments. They are circumspect about losing Thursday’s battle, and warn that an even bigger challenge lies in picking the right point to exit the QE programme. Weidmann said the impact of the ECB’s bond-buying program, known as quantitative easing, will likely be smaller than in the U.S., where interest rates were initially higher when the Federal Reserve started a similar program and because U.S. companies use capital markets for their funding to a larger extent than companies in Europe, according to the newspaper.

The first was 2010’s security markets programme (SMP), the second was 2012’s outright monetary transactions (OMT), still before German and European courts. Weidmann had earlier expressed reservations about the program, saying it carries the risk that fiscal discipline will be neglected and warning that it could help cause a bubble in property prices. Meanwhile, ECB Executive Board member Yves Mersch said in an interview published Saturday by Neue Osnabrücker Zeitung that the bond-buying program has been designed in a way that addresses the concerns of stability-oriented council members. The Frankfurter Allgemeine daily, house journal of Germany’s conservative and finance-market elite, effectively ran a front-page obituary for the euro yesterday, saying the ECB’s QE decision had “buried” monetary union.

The lower oil price should instead act as a boost to GDP as people, instead of spending their money on gasoline, will spend it on more discretionary goods and services such as going to the restaurant or the cinema. In order to regain competitiveness, prices and wages have to fall relative to core countries. have already stated that the country should run an inflation rate below the Eurozone average.

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