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ECB's Weidmann Casts Doubt On Big Purchases of Government Bonds
From the Wall Street Journal of Tue, 16 Dec 2014 06:34:51 EST
“QE programs, such as in the U.S.A., Great Britain or in Japan, can’t simply be transferred to the eurozone,” said Jens Weidmann, president of Germany’s Bundesbank.
“QE programs, such as in the U.S.A., Great Britain or in Japan, can’t simply be transferred to the eurozone,” said Jens Weidmann, president of Germany’s Bundesbank. Bloomberg News

FRANKFURT—The head of Germany’s central bank cast doubt on the benefits of large-scale purchases of government bonds, underscoring divisions between many European Central Bank officials and its largest member country as the ECB inches closer toward taking this step early next year.

In remarks to journalists late Monday Bundesbank President Jens Weidmann criticized the policy, known as quantitative easing or QE, on a number of fronts including doubts over its potential effectiveness, its chilling effect on economic reforms by governments and possible spillover effects in financial markets.

He didn’t close the door completely to fresh ECB stimulus, noting that officials must closely monitor inflation expectations and that if these were to fall, it would mean an unwanted tightening of financial conditions by raising inflation-adjusted interest rates.

Still, his comments suggest the bar remains high for Germany’s central bank to sign off on more aggressive easy-money policies.

“Against the backdrop of the rather modest and uncertain effect as well as the risks and side effects and the lack of a clear necessity at the current time, I judge currently a broad-based QE program skeptically,” Mr. Weidmann said.

Quantitative easing has been used extensively by central banks in the U.S., U.K. and Japan to reduce long-term interest rates and encourage borrowing and spending.

But the ECB has largely refrained from this step, instead centering its stimulus efforts on cheap loans to banks and targeted purchases of covered bank bonds and asset-backed securities.

Mr. Weidmann opposed the private-debt purchases when they were approved by the ECB in September.

But top ECB officials have sent strong signals in recent weeks that the central bank may embark on quantitative easing as soon as its Jan. 22 policy meeting. The ECB intends to raise the size of its balance sheet—the value of assets it holds—to around €3 trillion, implying a €1 trillion increase from current levels.

Many analysts doubt the current measures will get it that far, and ECB President Mario Draghi said on Dec. 4 that officials will reassess their programs in early 2015. The ECB’s challenge is complicated by the recent plunge in oil prices, which is expected to pull annual inflation—which was 0.3% last month in the eurozone—even further below the bank’s 2% target.

In a speech last week, ECB chief economist Peter Praet signaled a preference for buying government bonds to raise the balance sheet, saying it “would be the only market where size would generally not be an issue.”

Mr. Weidmann listed a number of counter arguments. Quantitative easing could weaken the motivation of governments to shrink deficits and reform their economies.

“It is of course not the task of the ECB Council to reward or punish governments with its monetary policy,” Mr. Weidmann said. “The success of monetary policy however does depend also on conditions that are beyond its control, such as stable public finances. We definitely must consider this in our decisions.”

Also, “an even more expansive monetary policy could abet exaggerations on financial markets” given the already low level of interest rates and risk premiums, he said.

And he warned that the policy may not be as effective in the eurozone as it was in the U.S., noting that eurozone households hold fewer financial assets than in the U.S., meaning they would see less of a boost from rising asset prices.

“QE programs, such as in the U.S.A., Great Britain or in Japan, can’t simply be transferred to the eurozone,” Mr. Weidmann said.

The German central banker played down the risks of a persistent fall in consumer prices, known as deflation, even though he noted that German inflation-which was 0.5% on an annual basis last month—may turn negative in coming months on the back of sharply lower energy prices.

“For me, a few months of inflation rates below zero does not constitute deflation. That would require self-perpetuating downward spiral of negative inflation rates, GDP declines and wage declines,” he said. “This risk remains minimal.”

Although Mr. Weidmann’s views carry great weight in German public opinion, he is only one of 24 members of the ECB’s policy committee and his opposition would unlikely derail a QE program.

Mr. Draghi has said the ECB doesn’t need unanimity to embark on QE.

—Hans Bentzien contributed to this article

Write to Todd Buell at and Brian Blackstone at

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