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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
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: firstname.lastname@example.org
--MNI Frankfurt Bureau; +49 69 97782671; email: email@example.com