Speaking at a conference in Venice, Bundesbank President Jens Weidmann said that fiscal discipline in the euro area was both absolutely essential and urgently needed to ensure that the set-up of a single monetary policy and decentralised fiscal policies worked well.

The asymmetrical design of monetary and fiscal policy in the euro area could, he told the audience, compound the tendency of governments to finance their spending through debt because the consequences of bad policy choices could more easily be externalised to neighbouring countries. If market participants were to begin regarding the monetary union as a system of mutual financial assistance in the event of serious trouble, doubts about a country’s solvency could spread more quickly to the other member states, he warned.

Live up to responsibility

Mr Weidmann stressed that common fiscal rules were an integral part of the EU treaties and that member states were fully responsible for the consequences of their own autonomous policies. Making a decision autonomously and being liable for the consequences were two sides of the same coin, Mr Weidmann explained, adding that this was a key safeguard against excessive government debt alongside the Stability and Growth Pact.

There were "good reasons", he said, why both the EU and European monetary union respected national differences to allow diversity in unity. "But that is precisely why all member countries must live up to their responsibilities and ensure that their economies are competitive and their public finances are solid," Mr Weidmann stated.

"Redistribution of risk"

The Bundesbank President took a critical view of the repercussions of the numerous fiscal and monetary policy measures taken to combat the sovereign debt crisis. "Although the rescue measures helped to stabilise the euro area, they caused a redistribution of risk and put elements of mutualised liability in place," he explained, going on to say that these crisis measures had permanently weakened the principle of individual responsibility. "As a result, while fiscal policy decisions are ultimately still made at the national level, joint liability has been considerably expanded." This, he concluded, undermines the necessary foundation for a stable and prosperous monetary union.

Sound public finances are the key to growth

Mr Weidmann told the audience that the rules enshrined in the Stability and Growth Pact and the Fiscal Compact needed to be strictly adhered to, not made "more flexible", explaining that diluting their binding effect would force the fiscal rules to take a back seat to other political considerations. Sound public finances in conjunction with structural reforms are a key precondition for growth, he concluded.