Guiding principles

Why the Bundesbank shuns liability-sharing in Europe

Weidmann Reuters 1800px
We'll talk money if you're accountable. Source: Reuters

For the umpteenth time, Jens Weidmann, president of Germany’s Bundesbank, stated his objection to sharing liabilities in the euro zone without nations handing over decision-making power to a central authority. At the root of his thinking lies Ordoliberalism, a school of thought that believes liability and control must always be in alignment.

Why is this important? Because the Ordoliberal approach fits neatly into Germany’s economic interests in the European Union, as the country is the biggest contributor to the EU budget and probably has the most to lose in the event of a financial disaster.

The influence is easy to spot. In an interview with Handelsblatt, Mr. Weidmann said many proposals to increase cohesion in the euro zone involved a “mutualization of risk,” without governments prepared to cede any sovereignty. “I think accountability without controls is problematic,” he said.

The Bundesbanker reiterated that euro-zone governments should reduce their mountains of sour loans and reassess the risk of sovereign bonds on banks’ balance sheets, shoring them up with more capital if necessary. This was a prerequisite for setting up a euro-zone deposit insurance, he added.

Reload and repeat

These are well-rehearsed messages that Mr. Weidmann brings home at every opportunity. Speaking in the town of Freiburg a day earlier, the central banker said that risk that arose under national sovereignty “should not be mutualized” just as “private individuals can’t take out insurance for damage that has already occurred.”

Here, too, the doctrine shines through. Ordoliberals believe any measure limiting accountability can create destructive incentives, for example, as in the “moral hazard” of providing a safety net for banks – or of providing a common insurance for euro-zone deposit-holders when there is no single EU controller of the national funding to meet claims. Pending the reform up for discussion, that’s still the case in Europe.

Followers of the tradition have an old-fashioned sense of fiscal responsibility. The German central banker called for closer European cooperation on a range of issues, including climate protection, defense, and migration, but said it was premature to already clear EU financing for them. “It’s wrong to put the cart before the horse and talk about the money first,” he said.

Jan Mallien and Frank Wiebe cover monetary policy for Handelsblatt in Frankfurt. Jeremy Gray, an editor for Handelsblatt Global, contributed to this article. To contact the authors: afhueppe@handelsblatt.com, mallien@handelsblatt.comwiebe@handelsblatt.com and j.gray@handelsblattgroup.com

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