MNI POLICY: Weidmann: Recovery Intact Despite German GDP Dip

By Luke Heighton

     FRANKFURT (MNI) - A decline in German third quarter GDP leaves the eurozone

economic upturn intact and monetary policy must return to normality without

unnecessary delay, the president of the German central bank said Wednesday, as

he criticized Italy over its ongoing battle with Brussels.

     Here are key points from Jens Weidmann's speech in Berlin:

     -- The "slight decline" in German economic output reported in Q3 is due

mainly to a slump in the car industry, as manufacturers adjust to the

certification of vehicles according to new emissions standard. Recent

unfavourable economic news and "fluctuations in the numbers ... must not hide

the fact that the economic upturn in Germany and the eurozone remains intact".

     -- It is "clear" the currency bloc "cannot lose time unnecessarily on the

long road back to monetary policy normality. We must not take risks and side

effects of extremely loose monetary policy lightly. Now, in a robust economic

recovery, is not the time to ease the fiscal reins in the euro area".

     -- September's ECB staff projections suggest inflation rates in the euro

area should reach 1.7% this year and next. The end of the asset purchase program

"is only a first step in a gradual monetary policy normalization. The next steps

depend on how the data wreath develops".

     -- It is not up to central banks to build cross-country consensus in fiscal

matters, while the monetary tools available to them are becoming progressively

fewer. The task of macroeconomic stabilization "will therefore have more to do

with fiscal policy than previously". Rather, the euro countries should reduce

their still high debt burden. "This is especially true for those countries that

carry a particularly heavy load, Italy for example".

     "It is perfectly legitimate for a new government to set new political

accents ... However, as far as these are associated with additional expenses, it

would be advisable to reduce other expenses or to increase revenue. The

necessary debt reduction must not be waived".

     -- Although uncertainty had a noticeable impact on economic activity during

the financial crisis, "no negative influence can be demonstrated for the recent

past. The connection between uncertainty and the real economy is not as close as

is often assumed", and political uncertainty in particular "seems to have little

explanatory power".

     -- That the macroeconomic effects of recent crises in Argentina and Turkey

have been contained is "an important point". New trade agreements and efforts to

reform the WTO mean the danger of a broad escalation of the trade conflict has

also decreased of late, even as the U.S. and China continue to confront one

another.

     -- Low interest rates have allowed firms that should have left the market

to remain. "The proliferation of zombie companies is detrimental to productivity

development. And that slows potential growth; that means headwind."

--MNI Frankfurt Bureau; +49-69-720-146; email: luke.heighton@marketnews.com

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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