Bundesbank chief: Firewalls only buy time against crisis

Feb 25, 2012, 1:48 GMT

Mexico City - German central bank chief Jens Weidmann told an international banking group Friday that raising firewalls against the fiscal crisis in the eurozone is no solution to the problem but gives leaders time to implement reforms.

The Deutsche Bundesbank president spoke to the Institute for International Finance in Mexico City, on the eve of a meeting of finance ministers and central bankers from the Group of 20 (G20) major economies countries.

The European Union has been bolstering its own stabilization fund, while also pushing to boost the International Monetary Fund's capital to help keep eurozone governments afloat in the face of nervous bond markets.

'Higher walls can buy time but time must be used to tackle the roots of the crisis,' Weidmann said. 'This includes consolidation of public finances, structural reforms and better rules at the European level.'

He said he was 'confident that, by following this course, we will eventually contain the crisis and the euro will remain a stable currency.'

Ahead of Saturday's meetings, the Organization for Economic Cooperation and Development (OECD) and the Institute for International Finance (IIF) called for solid leadership and coordinated action in the ongoing economic crisis.

'The global economy could take on different paths in the coming months, if action by governments and leaders shows decisiveness, effectiveness and coordination,' OECD Secretary General Angel Gurria said. 'This requires the appropriate mix of macroeconomic policies, and structural reforms. They are necessary both to accelerate the exit from the deep phase of the crisis and to make longer-term growth stronger, more sustainable and more equitable.'

A similar message came from the IIF, which brings together 450 banks and insurance companies.

'Finding a way forward for the Euro Area, minimizing spillover effects on the global economy and helping ensure that the private financial sector can provide an appropriate level of credit growth will require a strengthened framework for more international policy coordination,' the IIF said in a policy letter.

'Acting alone is no longer a viable option: The financial resources of many individual countries are stretched, and collective global leadership is sorely needed.'

European Union leaders are expected to call for a substantial increase in the money available to the IMF. However, G20 members are divided on the issue. The United States, in particular, is hesitant about ploughing more money into the international crisis lender's coffers for bailouts of troubled eurozone economies.

The OECD stressed that job creation should remain a top concern.

'At this time of global economic uncertainty, priority should be given to policies that boost jobs,' Gurria said.

'This is absolutely essential. The crisis has had a dire social cost. More than 200 million people are unemployed worldwide, and 45 million of them are in OECD countries (14 million more that before the crisis).'

To address particular concerns over youth unemployment, active labour-market policies and growth-friendly tax reforms are cited as ways to prevent a 'lost generation.'

The IIF pointed to additional areas of concern: 'While necessary, fiscal austerity will in the short term weigh on already subpar growth. Moreover, it is widely recognized that while vis-a-vis the rest of the world, the Euro Area is a balanced economy, internal imbalances - in particular divergent levels of competitiveness - remain. Addressing these imbalances will take time.'

Both organizations stressed the need for reform.

'Crises offer a unique opportunity to implement difficult reforms. Such opportunity should not be lost,' Gurria said. 'This crisis has acted as a catalyst for reforms, sometimes unpopular, painful or both. These efforts will pay off. Let's keep up the reform momentum.'

The IIF called for 'a much stronger approach to global policy coordination, encompassing a set of consistent objectives, discipline and accountability agreed at the highest political level.' The group urged the G20 to install 'a framework that would require accountability from systemically important economies.'

G20 nations comprise almost 90 per cent of global GDP and two-thirds of the world's population. The group has been holding regular meetings of finance ministers and central bank governors since 1999 and leaders' summits since 2008.

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