All 200 seats in the lecture hall at the Bundesbank's University of Applied Sciences in Hachenburg were taken and extra chairs had to be brought in to accommodate the large number of students who had flocked to listen to Bundesbank President Jens Weidmann’s speech on "The outlook for the euro area." In his remarks, the President addressed the challenges posed by the fact that, while the euro area has a common monetary policy, it also encompasses 19 largely national fiscal and economic policies. "Not only does this particular composition make European monetary union unique – it also makes it vulnerable," said Mr Weidmann, explaining that "there is less of an incentive to run a sound fiscal policy in a currency union because the consequences of excessive debt in one member state can, at least to some extent, be passed on to the rest of the group." This is why the Maastricht Treaty contains a no-bailout clause prohibiting member states from assuming each other’s debts and bans the monetary financing of governments by the Eurosystem, he continued, noting that in addition to these rules, advocates of the monetary union also rely on the disciplining effect of the financial markets, which penalise excessive debt with higher interest rates. However, he stressed, this has not proven effective in practice in the euro area. "Neither the rules nor the financial markets were able to stop the euro-area crisis from happening." Although the rescue measures taken by the euro-area countries and the Eurosystem succeeded in preventing the crisis from escalating, he acknowledged, they did not make the monetary union more resilient to crises in the long run. "Instead, they have softened the principle of independent responsibility, throwing the relationship between actions and liability for their consequences off balance."

Proposal: abolish preferential treatment of sovereign bonds

Mr Weidmann outlined two possibilities – "either the member states surrender decision-making powers in fiscal and economic policy matters to the European level, or we return to the original Maastricht framework." Since the first option would require changes to be made to the EU Treaty, which he considers fairly unlikely at present, that probably leaves only the second option. Mr Weidmann suggested that the fiscal rules, which have been reformed several times over the last few years, should be simplified and political leeway reduced, arguing that only this can strengthen the binding effect of these rules. To reinforce the credibility of the no-bailout clause, he continued, it must be possible to restructure sovereign bonds without jeopardising the stability of the financial system. "That is why the Bundesbank is proposing the automatic extension – by three years, for example – of the maturity of bonds issued by governments that apply for assistance under the European Stability Mechanism or ESM." This window could also allow the ESM to establish more accurately whether a government is "temporarily illiquid or actually insolvent," he told his audience. Ultimately, he noted, the ESM can only help in the case of liquidity problems, otherwise a haircut would be the logical conclusion. Against this backdrop, Mr Weidmann also repeated the Bundesbank’s proposal that sovereign bonds should no longer be given preferential treatment.

Where is there scope for monetary policy?

Last of all, Mr Weidmann turned to the current monetary policy situation, observing that although the members of the Governing Council of the ECB agree that "an accommodative monetary policy stance is currently justified in principle," opinions differ on the degree of expansion that is needed. He pointed out that "domestic price pressures are gradually building" as a result of the economic growth in the euro area, which has, after all, persisted for the last 17 quarters. "In light of this, I believe that bringing the net asset purchases to a swifter close and signalling a clear end date would certainly have been appropriate," said Mr Weidmann.

After the speech, students took the opportunity to ask the President questions and discuss the current monetary policy situation. Once again he stressed that, in his opinion, monetary policy at present "does not represent a normal situation and we should expect interest rates to rise again in future," reminding the students that the Eurosystem has a clear mandate to which it must gear monetary policy and that it cannot take into consideration fiscal policy in the individual member states.

At the end of the event, which lasted just over an hour, there was prolonged applause from the audience. It was the first time that Sohejla Bryatloo, who is completing the foundation course at the moment, had met the President. "His speech was fascinating," she said with enthusiasm. "And Mr Weidmann was also very friendly and down to earth – not at all what you might expect from a President." Vincent Marquardt, who is currently completing the in-depth study modules, was equally impressed. "It was very interesting. Without a single slide, he managed to captivate the audience." Even after the event was officially over, President Weidmann stayed on to chat with a few students, finally leaving Hachenburg Castle just before 8 pm – an evening that many of those present won’t forget in a hurry.

© Matthias Ketz

© Matthias Ketz

© Matthias Ketz

© Matthias Ketz

© Matthias Ketz

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