ECB’s Weidmann Tells Governments to Spend Now But Save Later

(Bloomberg) --

Bundesbank President Jens Weidmann praised euro-area governments for “significant, impressive” spending in the fight against the coronavirus, but warned that they’ll need to tighten their budgets once the emergency has passed.

The German central banker, whose candidacy for the European Central Bank presidency last year was scuppered by concerns that his conservative financial views would hinder crisis fighting, told Bloomberg in an interview by email that the economy will need broad support for some time. He also argued that “the pandemic plainly shows how important a solid fiscal policy is.”

“An extremely expansionary fiscal stance cannot be sustained permanently,” he said. “Going forward, then, all countries will have to focus on reducing the very high debt ratios and ensuring acceptance in the capital markets, and to do this in a way that is compatible with our fiscal rules.”

The comments strike at the heart of the debate over how Europe should handle the aftermath of the coronavirus, with governments across the 19-nation bloc pledging hundreds of billions of euros to support small businesses and compensate for lost wages.

Countries including Germany and the Netherlands have rejected burden-sharing tools such as joint bonds, instead focusing on making loans available to the worst-hit countries like Italy and Spain. Already heavily indebted, those Mediterranean nations fear an austerity squeeze if they’re later pushed to reduce their borrowings.

Investors are showing their concerns. The spread between yields on Italian and Spanish bonds compared with German ones has widened, sparking memories of the 2012 debt crisis. Some think more fiscal or monetary action will be needed.

“It is not yet possible to say for sure whether the measures taken to date will be enough,” said Weidmann, 51, who sits on the ECB’s Governing Council. “Monetary policy is making a major and important contribution within the scope of its mandate, and will continue to play its role.”

The ECB has pledged to buy more than 1 trillion euros ($1.1 trillion) in private and public debt this year and is offering nearly unlimited cash to banks to ensure they keep funneling credit to companies and households.

While the U.S. Federal Reserve will lend to businesses requiring support, Weidmann said that step is unlikely in Europe because of its heavy reliance on banks.

Policy makers including ECB President Christine Lagarde have signaled they’d prefer to step up asset purchases should more stimulus be warranted. They’ve also repeatedly encouraged governments to act forcefully to protect their economies.

Weidmann repeated that sentiment, urging politicians to “step up in this situation” but suggested he wasn’t troubled by their failure to agree on joint debt.

“As per the European Union’s design, the dominant force of the fiscal-policy expansion is the national level,” he said. “Europe doesn’t need to conceal its response to the crisis, and I feel confident about the future of the European project.”

The lockdowns to tackle the pandemic have dealt the continent its worst economic slump since World War II, with the International Monetary Fund predicting an annual economic contraction for the euro zone of 7.5%.

That assumes the pandemic will fade in the second half of the year and containment efforts can be gradually unwound -- a scenario Weidmann labeled “generally plausible.”

What Bloomberg’s Economists Say...

“What output gain is achievable as containment measures are eased? Our back-of-the-envelope calculations suggest the move from full lockdown to moderate containment could allow output gains of about 20%, with a further 10% boost achievable as mild social distancing becomes the norm.”

--Jamie Rush and Maeva Cousin. Read the EUROPE INSIGHT

The IMF is holding its spring meetings this week -- conducted virtually for the first time. The Washington-based lender has granted billions of dollars of aid to the most vulnerable countries, approved debt-service relief for 25 low-income states and established short-term liquidity lines to prevent a global shortage of dollars.

Weidmann called that liquidity line an “important addition” to the IMF’s toolkit, and the suspension of debt-service payments “crucial” to allow poor countries to focus resources on support to their citizens.

He was less enthused about the IMF’s push to create more of the reserve assets known as special drawing rights, which is supported by countries including France and opposed by the U.S.

Weidmann noted that the design of SDRs means they would generate liquidity mostly for more advanced economies instead of those that need it.

“It is a rather blunt instrument,” he said. “However, I think it is certainly wise to leave all options on the table at this point.”

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