Bundesbank to ECB: Don't overstep

German Chancellor  Angela Merkel's government signals its concern about ECB bond buying.

Story highlights

  • Germany's Bundesbank chief warns European Central Bank against straying beyond its remit
  • Comes ahead of ECB's Thursday meeting to discuss possible bond market intervention

The head of Germany's Bundesbank has warned the European Central Bank against straying beyond its remit, as the bloc's central bankers gathered on Wednesday night to discuss a possible plan to re-start intervention in government bond markets.

Jens Weidmann, Bundesbank president, said the ECB's independence "requires it to respect and not overstep its own mandate" to guard against inflation.

Policy makers "overestimate the central bank's possibilities" when calling on the ECB to support economic growth, create jobs and stabilise the banking system, Mr Weidmann said.

The Bundesbank had a greater say than many of the bloc's central banks because Germany's monetary authority was "the largest and most important central bank in the euro system", he said.

Mr Weidmann's comments appeared on the Bundesbank website a day ahead of the conclusion of the ECB's policy-setting meeting, and were seen by some investors as a warning shot to Mario Draghi, ECB president, against stepping up ECB intervention in the eurozone crisis.

Quest: What can central banks do?
Quest: What can central banks do?


    Quest: What can central banks do?


Quest: What can central banks do? 01:24

Mr Draghi last week raised hopes that the ECB was preparing a fresh round of measures to tackle the crisis, lowering the cost of borrowing for Spain and Italy ahead of Thursday's meeting of the governing council of top central bank officials. The Bundesbank denied Mr Weidmann's comments -- made in an interview in late June to mark the central bank's 55th anniversary -- were intended as a riposte to the ECB president.

Mr Draghi has in recent days talked with the eurozone central bank governors that sit on the governing council about a deal to support purchases by the European Financial Stability Facility, the bloc's temporary rescue fund, of sovereign debt at government auctions, with the ECB buying bonds in secondary markets. But it is unclear whether all of the elements needed for a deal will be in place in time for Thursday's vote.

A deal would involve the EFSF buying bonds directly from governments after they and their parliaments had committed to sign memoranda of understandings, which would involve hitting deficit targets set by the European Commission and implementing structural reforms.

The missing element so far has been the unwillingness of Spain in particular to sign such an agreement. If Madrid was willing to sign up, then such a deal would, in effect, mean that the ECB's bond purchases were conditional on economic reform -- unlike its earlier forays into the sovereign bond markets.

The Bundesbank is likely to object to the measures on the grounds that they are akin to fiscal policy and stray beyond the remit of the central bank.

Nonetheless, the Bundesbank has a record of publicly disapproving of some of Mr Draghi's interventions and investors see opposition from Germany's central bank as a serious constraint on the ECB's capacity to address the crisis. Germany's central bank has only one vote on the governing council, and so its opposition is surmountable if other council members sign up to Mr Draghi's plan.

The Bundesbank indicated last week that it remains opposed to the ECB resuming its government bond-buying programme, dormant since March. Germany's central bank also objects to the ECB granting a banking licence to the European Stability Mechanism, the bloc's firewall. The granting of a licence would extend the ESM's €500bn kitty to buy sovereign debt several times over by allowing it to access ECB funds in exchange for government bonds.

Mr Weidmann met with Mr Draghi on Monday ahead of Thursday's vote.