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At the European Banking Congress in Frankfurt am Main, Bundesbank President Jens Weidmann called attention to the growing risks of ultra-loose monetary policy in the euro area. In this regard, he referred to excesses in some financial markets and problems being faced by life insurers in an extremely protracted phase of low interest rates. He also cautioned that “the longer we stay in ultra-loose monetary policy mode, the less effective this policy will become”. The very low interest rates could also cause consolidation efforts to peter out, Weidmann said before an audience of around 800 financial services professionals. Therefore, he added, “... we should not ignore the risk that fiscal policy could get used to the very low interest rates”.

Weidmann counsels patience

In the light of these risks, the Bundesbank President counselled patience in the debate on whether the monetary policy of the Governing Council of the European Central Bank should become even more accommodative, despite the currently low euro-area inflation rates. He said that “the monetary policy measures already taken still need time to fully feed into the economy”. Although prices were far removed from the ECB’s avowed inflation target of just below, but close to, 2% – in actual fact, annual euro-area inflation in October stood at 0.1% –Weidmann saw this as being mainly the result of falling oil prices, which are reducing the costs of energy, in particular. “This drop has pushed down headline inflation by about one percentage point,” he noted. He saw this development as more of an economic stimulus package than a harbinger of deflation. Core inflation – which excludes energy and food prices – was consequently significantly higher, at just over one per cent. Weidmann added that it would, over the medium term, “gradually increase towards our definition of price stability”.

Bleak picture of situation should not be drawn

In his speech, Bundesbank President Weidmann also touched upon the current economic outlook for the euro area. Despite the recent emergence of downside risks associated with an economic slump afflicting key emerging market economies and growing uncertainty caused by migration movements, Weidmann saw no reason “to talk down the cyclical outlook and paint a bleak picture of the situation”.

However, in order to further drive economic growth, it was necessary, in his view, to tear down barriers to market entry, advance digitalisation and, first and foremost, reform labour markets. In addition, refugees needed to be integrated into the job markets. Weidmann noted that this would require “decisive policy action”, including “language courses, improving school education, and vocational training”. However, he added that “we should be realistic and not create undue expectations. Experience suggests that integrating refugees into the labour market will take time. In the end, immigration can alleviate our demographic challenge, but it cannot solve it completely.”

In a panel discussion following Weidmann’s remarks, Paul de Grauwe of the London School of Economics also concurred that integration was the key. On the other hand, Ifo Institute president Hans-Werner Sinn was sceptical of the chances of successfully integrating the influx of refugees. He said that well-educated migrants were needed, but that many of the refugees arriving from, for instance, Syria were not very well educated, and that illiteracy was high among this group of people.