Weidmann looks at how thinking on central banking has changed over the years due to some or the other crisis. Also adds German experience to the history.
This bit actually sums up everything wrong with EZ central banking:
Greece is a topic that shows us in no uncertain terms that, despite the deeper integration that the crisis brought about in Europe, the euro-area member states are ultimately still responsible for their own affairs. They can decide for themselves not to service their debts, to collect taxes inadequately, and – this is something I particularly fear in the case of Greece – to lead their country’s economy into deep trouble. The Greek government has not only walked out on the previous agreements, but has been widely criticised as an unreliable negotiating partner. A little over a week ago, the assistance programme finally came to an end, and the Greek government has stopped honouring its payment obligations towards public creditors such as the IMF.
In addition, a clear majority of the Greek general public have spoken out in a referendum against contributing any further to the solvency of their country through additional consolidation measures and reforms.
What is the role of central banks in this situation?
Central banks – although they have the means – have no mandate, in my view, to safeguard the solvency of banks and governments. That kind of implicit redistribution is a matter for governments or parliaments, if at all.
Despite the practical difficulties involved in telling illiquidity from insolvency in real time, central banks need to show where their limits lie. Besides, in Greece doubts about the solvency of banks are legitimate and rising by the day. It needs to be crystal clear that responsibility for further developments in Greece and for any decisions on transferring financial resources lies with the Greek government and the countries providing assistance – not the ECB Governing Council.
The Governing Council recently ensured that the provision of emergency liquidity assistance (ELA) was frozen, and I welcome the fact that further deposit outflows have been stemmed by the capital controls. ELA is no longer being used to finance capital flight caused by the Greek government. This certainly represents a step forward, and shifts the responsibility to where it belongs: with the governments and parliaments. In any case, the Eurosystem should not increase the liquidity provision, and capital controls need to stay in force until an appropriate support package has been agreed by all parties and the solvency of both the Greek government and the Greek banking system has been ensured.
In the event that further short-term assistance is thought to be desirable or necessary, it is up to fiscal policymakers to provide ad hoc financial support.
Ever growing expectations with regard to the contribution of central banks and the increased role they actually play are more a curse than a blessing. Undoubtedly central banks are powerful institutions, but they are well advised to stick to a narrow interpretation of their mandate if they wish to preserve their credibility and independence.
Well, would Bundesbank/Weidmann views be similar if say Germany was in Greece’s shoes?
Central banks have created huge hype and myth over their superior powers to manage and fine tune the economy. No government will really fund a central bank which does not come to the rescue of the home economy. All this talk of central bank independence has been taken too far and has become highly unrealistic. Central bankers should not forget that at the end of the day they are nothing but a part of the govt. All the powers of a central bank come from the large monopoly powers govt give to their central banks. And here we have an ECB kind of a central bank which actually refuses to help its member country. And it actually becomes like a fiscal agent which provides funds based on certain conditions. Why didnt an independent ECB actually say no to such fiscal policies at the first place?
If Greece had a central bank, things would not have gone to this extreme. Whatever the causes and consequences, they would have been faced mostly by Greece. Just like Iceland did. Eurozone has been a royal mess and high time higher authorities accept it.