Bundesbank President Jens Weidmann has reiterated his criticism of the Eurosystem’s government bond purchases. Such purchases caused a blurring of the boundary between monetary and fiscal pol-icy, he said in a speech delivered at the Ruhr University Bochum. It was worrying that the purchases meant that a large part of general government debt was no longer subject to the disciplining effect of the capital markets. “The present low-interest-rate environment is providing notable relief for finance ministers, especially those of highly indebted countries,” Weidmann explained. Compared with the in-terest rate level back in 2007, euro-area countries had collectively saved around €1,000 billion in in-terest payments. “And you don’t need to be a "nattering nabob of negativism" to fear that there may be political pressure on the ECB’s Governing Board to postpone any normalisation of monetary policy out of concern for public finances,” the Bundesbank’s president said before around 600 students and lecturers.

Tighten monetary policy in timely manner

Weidmann also warned that the currently ultra-accommodative monetary policy presented risks for fi-nancial stability in the long term. The zero interest rate policy was hurting commercial banks’ profitabil-ity and, with it, their ability to build up capital buffers for bad times. “It can lead to speculative bubbles on the financial markets and other financial imbalances which, in turn, can generate long-term risks for price stability,” he said. It was therefore essential that central banks tighten monetary policy again as soon as this was necessary for price stability. Weidmann pointed out that the forecasts for consumer prices and core inflation, ie excluding energy and unprocessed food, suggested a return to the target of below, but close to, 2% in the medium term. “[B]y virtue of the sustained economic upswing and the gradual decrease in unemployment in the euro area, wages – and therefore domestic price pressures – are likely to pick up again,” the Bundesbank’s president explained. Below, but close to, 2% is the medium-term rate of inflation that the ECB’s Governing Council has defined as price stability.

Higher investment in education necessary

In his remarks, Weidmann also discussed the economic events of the past ten years. He pointed out that what is known as the liability principle had been undermined in the run-up to both the financial cri-sis and the subsequent euro-area crisis. This lesson from the past should be taken seriously, he urged. He therefore warned against turning back the clock on regulation. The financial crisis had demonstrated how dangerous insufficient regulation is. Thanks to comprehensive reforms, the global financial system was more robust now, Weidmann stated.

The framework of monetary union, too, needed to be designed in such a way that actions and ac-countability were aligned, he went on. The euro-area governments had to use smart economic policy-making to ensure that their economies are successful and do not drift apart. “They have to give people the opportunity to make the most of globalisation and technological advances and offer them employment prospects,” Weidmann explained. Particularly the very high youth unemployment in some countries, for instance, highlighted the need to continue dismantling barriers to employment. Low productivity in many countries was also an argument to invest more in education and training. “Public administration and the legal system must become more efficient in some countries,” the Bundesbank’s president said. Germany also needed to invest more in education given unfavourable demographic trends and other challenges, such as the integration of refugees into the labour market.

Warning of cyber attacks

In terms of potential triggers for future crisis, Weidmann also warned of internet-related risks. “Maybe the next crisis will be triggered by cyber attacks or hacker attacks and not by risks in banks' loan books,” he said. The increasingly digitalised nature of financial market infrastructures was leaving the financial system increasingly exposed to such risks. Under certain circumstances, he said, only one of the many cyber attacks carried out on a daily basis needed to succeed in order to paralyse the activities of a bank for a while, thereby throwing the financial system into disarray.