Europe’s economy isn’t that bad, Germany’s top banker argues

28 Dec 2014 | Author: | No comments yet »

Could Jens Weidmann and The Bundesbank Return To The Same Planet As The Rest Of Us Please?.

Jens Weidmann, the President of the Bundesbank (Germany’s central bank) has been out and about giving newspaper interviews in which he asserts that an ECB bond buying program (also known as quantitative easing, or QE) just really isn’t necessary This is because the fall in the price of oil will act as a fiscal stimulus to the eurozone economies. BERLIN (Reuters) – The head of the panel of economic experts that advises the German government said on Sunday there was no reason for the European Central Bank (ECB) to start buying up sovereign bonds now to bolster euro zone growth. The ECB is considering whether and how to offer more stimulus for the sluggish eurozone economy, perhaps in the form of large-scale purchases of government bonds — not a popular idea in Germany. ECB President Mario Draghi has opened the door to further measures to help the currency union which is suffering from an economic slowdown, and said the bank would decide early next year whether to take fresh action. In an interview with Bild newspaper on Saturday, Schaeuble repeated his view that structural reforms are needed in some of the struggling euro zone countries. “The ECB can make its decisions independently,” Schaeuble said. “But cheap money should not be allowed to dent the reform zeal in some countries.

Bundesbank chief Jens Weidmann told German newspaper Frankfurter Allgemeine Sonntagszeitung that growth in Germany and other EU countries could be better than expected in 2015 because of low oil prices. Germany forecasts only 1 percent growth next year. “As things are at the moment and if oil prices remain this low, inflation will be lower than expected, but growth will be better,” Weidmann told the German publication. Weidmann is the most vocal opponent of such a step in the 24-member Governing Council, concerned the central bank could end up bankrolling troubled euro zone governments and lose sight of its mandate to keep prices stable. “(With low oil prices) An economic stimulus programme has been handed to us, why should we add to that with monetary policy?” said Weidmann, adding that pressure from financial markets should not determine the ECB’s moves. The ECB has set itself a goal of expanding its balance sheet by buying assets from banks and others in return for cash it hopes will be pushed into the economy — by up to 800 billion or even 1.0 trillion euros (1 trillion pounds). That’s something of a problem as both France and Italy seem to be on the edge of a deflationary spiral (and there are concerns that Belgium is already in one, as Greece also obviously is).

Even though the Bundesbank this month halved its growth forecast for Germany, the situation in Europe “isn’t as bad as some people believe,” he said. Weidmann has cautioned the ECB about the legal hurdles it would face in printing money to buy government bonds, underlining his opposition to such a move, laying bare entrenched German opposition to such a policy. Schaeuble, when asked whether Weidmann has enough clout in the ECB, said: “Germany’s voice has weight…But even if we’re the strongest economy, Germany can’t always get its way. Plummeting oil prices over the last three months have had major economic impacts around the globe, as they have dropped 40 percent to their lowest levels since the crash of 2008-2009. That’s not a good combination: static or even falling nominal GDP, and thus tax revenue from it, while the bill that must be paid from it rises in real terms.

However, the drop may come at a price, with Goldman Sachs estimating that $60 per barrel oil could threaten $1 trillion in new investments in oil production. Those structural reforms (which very definitely include falling real incomes for some parts of some eurozone economies) are going to be much easier to perform if there’s a little bit of inflation.

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