Bundesbank President Jens Weidmann has criticised the continued provision by the Eurosystem of emergency liquidity assistance (ELA) to Greek banks. He pointed out that the ELA had originally been conceived as a temporary source of liquidity for financially sound banks in return for good collateral. Speaking at an event in Frankfurt, Mr Weidmann went on to say that in the case of Greece, ELA had been provided for a protracted period of time and had become those banks’ only source of funding.

Mr Weidmann remarked: "This casts doubt on their financial solidity," and added that this doubt was being amplified by Greek policy decisions that had sparked capital flight and large-scale cash withdrawals from Greek accounts.

Key policy condition for economic prosperity

Mr Weidmann expressed the view that banks receiving ELA should be urged to do their utmost to improve their liquidity situation, and that "these institutions should be prevented from worsening it further by rolling over illiquid T-bills of their sovereign." He argued that it should be clear to all the parties to the current negotiations that the Eurosystem must not provide bridge financing to Greece even in anticipation of later disbursements. "When banks without access to the markets buy debt of a sovereign which is likewise locked out of the market, taking recourse to ELA raises serious monetary financing concerns," Mr Weidmann warned.

The Bundesbank President stated clearly that respecting the core principles of monetary union was not a matter of dogmatic German stubbornness, but "a key policy condition for long-term economic prosperity in the euro area and for maintaining popular support for the historic project which European integration no doubt is".

No control – no liability

Mr Weidmann's speech also touched upon the recently published "Five Presidents" report, in which President of the European Commission Jean-Claude Juncker, President of the European Council Donald Tusk, Eurogroup President Jeroen Dijsselbloem, ECB President Mario Draghi and President of the European Parliament Martin Schulz outline how, in their opinion, European Economic and Monetary Union might be strengthened and completed by the year 2025 at the latest. The authors of this report propose establishing fiscal risk-sharing mechanisms in the long run. Mr Weidmann remarked that extending common liability would, however, have to be balanced by a commensurate shift towards European control. "Shifting fiscal control and intervention rights to the European level must come first; after that, the mutualisation of liability may follow," the Bundesbank President criticised; but the "Greek drama" had eroded public and political support for further transfers of national sovereignty to the European level.