FRANKFURT: The dangers of contagion from a possible Greece insolvency should not be underestimated, the head of the German central bank said on Thursday, warning that the risks of such a scenario were increasing daily.
“There is a strong determination to help Greece … But time is running out, and the risk of insolvency is increasing by the day,” Bundesbank chief Jens Weidmann told a London investment seminar as Greece and its European partners intensify efforts for a bailout deal to prevent Athens from defaulting.
The contagion effects of a possible insolvency scenario were “certainly better contained than they were in the past, though they should not be underestimated. But the main losers in that scenario would be Greece and the Greek people,” he insisted.
And he added that “an erosion of the principles of monetary union also has consequences for … monetary union that no-one should downplay.”
Weidmann was adamant that Greece must meet its reform commitments if it expected its eurozone partners to help it out.
“Solidarity can only be expected if conditionality is accepted. Otherwise, the root causes of the problems will not be addressed,” he said.
Partner countries were determined to help Greece “improve its public administration, remove barriers to growth and put public finances on a sustainable path. And taxpayers from other euro-area countries have provided substantial funds to support the unavoidable adjustment processes,” Weidmann said, but Greece must play its part.
His comments came as Greek premier Alexis Tsipras was scheduled to meet with European Commission chief Jean-Claude Juncker in Brussels.
A day earlier, Tsipras had agreed with German Chancellor Angela Merkel and French president Francois Hollande to intensify efforts for a bailout deal.
Weidmann, who as Bundesbank president sits on the decision-making governing council of the European Central Bank, said that governments could not look to the ECB to come to their rescue.
“It can be generally said that monetary policymakers are increasingly being called upon to step in and take action,” he said. “Central banks … run the risk of being overburdened.”
In a bid to pull the single currency area out of a potentially dangerous deflationary spiral, the ECB has slashed interest rates to all-time lows, pumped unprecedented amounts of liquidity into the financial system and recently embarked on a controversial program of bond purchases, known as quantitative easing or QE.
Weidmann himself said he “had (his) doubts about the need for a large-volume QE program.”
“Central banks are set to become the euro-area member states’ biggest creditors. When governments become accustomed to the favorable financing conditions, this could dampen their willingness to consolidate their budgets and implement structural reforms,” he argued.
“And it could make governments more keen to try to prevent the ECB from terminating its ultra-easy monetary policy. At the end of the day, this could jeopardize central bank independence, undermining our ability to maintain price stability.”
Monetary policy could stimulate the economy in the short run but it could not deliver sustainable growth, said Weidmann.
“It’s forward-looking economic policy that sets the course for sustainable growth,” he concluded.