MNI: Bundesbank Weidmann Offers Renewed Support For EDIS, ESM

By Chris Mc Innes

     LONDON (MNI) - Bundesbank President Jens Weidmann gave renewed support

Thursday to the introduction of a European deposit insurance scheme and to

giving the European Stability Mechanism broader powers to make the single

currency block more resilient.

     Giving the Ludwig Erhardt memorial lecture in Berlin, he also rejected

proposals to create a dedicated Eurozone budget. He also resisted calls to

transform the ESM into a European Monetary Fund and to enshrine it into the

European treaties.

     Weidmann underscored the progress made since the crisis in strengthening

the euro area's governance but admitted that further steps were needed to

protect from future shocks. Reforms should balance solidity and solidarity in

equal measure, Weidmann said.

     He offered support for a European Deposit Insurance Scheme, but only if

certain conditions are met.

     "A European deposit insurance would without a doubt contribute to a more

stable financial system, because risks of a run on banks would diminish and the

Banking Union would be complete," he noted.

     But before deposit insurance can go ahead, the Buba chief insisted that the

number of non-performing loans must be reduced and that the bank-sovereign 'doom

loop' must be broken. This could be achieved by stripping sovereign bonds of

their preferential regulatory treatment, he suggested.

     --MORE ESM, NO ESF

     Weidmann described as misguided proposals to transform the ESM into an ESF,

because the primary focus of the ESM is on fiscal and macroeconomic policies,

not monetary ones. What is more, "the ESM already combines -- in convincing

fashion I find -- solidarity and solidity."

     The ESM could take on a larger role in crisis prevention by taking on

budgetary surveillance tasks to mitigate the political interference of the

Commission in the application of European budget rules. It could also become a

central cog in the orderly restructuring of sovereign debt.

     --NO EUROZONE BUDGET

     The German ECB governing council member questioned the wisdom of a Eurozone

budget, arguing that "as long as Member States have solid public finances and

follow the fiscal rules, they should have enough wiggle room in the face of

external shocks." The ESM could step up in case of a crisis, he added.

     A Eurozone budget would also come with considerable problems and negative

side-effects in his view. The risk of moral hazard could emerge, as the

guarantee of financial assistance without conditionality could weaken reform

efforts in Member States.

     Weidmann's proposals run counter to the consensus currently building in

Brussels and he is at odds on certain aspects with the Berlin government. Angela

Merkel last month called for the Banking Union to be completed but there is

little political appetite in Germany to head down that road.

     He also took the opportunity of his speech to advise European Union member

states to focus the next EU budget on "value-added" projects and to seize the

reform momentum to drive the European project forward. Because, according to

Weidmann, Brexit had also highlighted the positives of the EU.

--MNI London Bureau; tel: +44 203-586-2225; email: les.commons@marketnews.com

--MNI Frankfurt Bureau; +49 69 97782671; email: frankfurt@marketnews.com

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