Bundesbank/Weidmann on fiscal policy and financial market integration

11 February 2014

Weidmann argued for an adapted regulatory framework to make the financial system more resilient to crisis by restoring greater validity to the principles of competition and liability.

Fiscal policy

In view of past experience with fiscal rules, in particular, I strongly believe that the euro area can only be maintained as a stability union in the long run if its framework sufficiently embodies a key principle of regulatory policy: the principle of liability. In the context of public finances, this means that those who make decisions on spending must also take responsibility for them. In other words, there must be a balance between control and liability.

In principle, the Maastricht framework assigned both liability and control to national governments. During the crisis, the EFSF and ESM bailout funds stabilised the euro area but also increased the mutualisation of liability for previous national errors. To restore the balance between control and liability, I only see two plausible options: either we shift powers to monitor and intervene to European level by creating a fiscal union, or we strengthen the Member States’ individual liability and responsibility in a return to the Maastricht framework. This also ultimately means that sovereign insolvencies cannot – and must not – be ruled out. They must be possible without also causing the financial system to collapse. The current balancing act between individual responsibility and mutualised liability is likely to lead to new strains in the long run. 

Financial market regulation

In order to make the financial system more resilient to crisis, and thus to restore greater validity to the principles of competition and liability, changes will also need to be made to financial market regulation. A particularly severe problem which arose during the crisis was the "too-big-to-fail" problem: whenever banks become too large or interconnected to be wound up without jeopardising financial stability, this undermines the liability principle and ultimately disrupts competition, and represents an invitation to act irresponsibly.

Recent developments in the financial sector, such as increased indebtedness and the burgeoning growth of the shadow banking sector, require new rules as well. There must three primary objectives behind these new rules.

Full speech


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