ECB’s Weidmann: Must Be Clear That Monetary Policy Not at the Service of Fiscal Policy

27 May 2021

By David Barwick – FRANKFURT (Econostream) – It needs to be evident to everyone that the European Central Bank is not subordinating monetary policy to fiscal policy, ECB Governing Council member and German Bundesbank President Jens Weidmann said Thursday.

In a speech for the 70th anniversary of the German Economic Institute, a copy of which the Bundesbank made available, Weidmann said that it would not remain the case that monetary and fiscal policy are working in the same direction.

‘Tensions are likely to re-emerge once the pandemic-related crisis is over’, he said. ‘Monetary policy in the euro area is committed to price stability and must tighten its reins again when the price outlook dictates. It must be clear to all that we are not putting monetary policy at the service of fiscal policy.’

So that monetary and fiscal policy come into conflict less, fiscal support should be targeted and not open-ended, he said. He warned of allowing demographic trends that would eventually burden public finances to coincide with a period of increasing borrowing costs and high indebtedness.

‘After the pandemic, it is therefore important to put public finances on a sound footing again’, he said.

For now, however, he cautioned against a premature removal of government support. ‘In view of the continuing uncertainty about the course of the pandemic and its economic impact, a cautious approach is called for’, he said.

‘However, the Corona crisis should not be used as a pretext to once and for all throw overboard fiscal rules that are unwelcome to some’, he continued. ‘A loose fiscal policy with high deficits may be popular in the short term. However, the return to sound public finances must not be postponed until never.’