Jens Weidmann—–Mr. Nein—– Is A Ray Of Light In Europe’s Economic Dark Age

BuBa chief Jens Weidmann is complaining about the EU Commission’s decision to eschew confrontation with France over its repeated inability to deliver on its debt and deficit targets, and rightly so.

Some people may argue that the French government’s recent willingness to implement some long-overdue, if halfhearted reforms, should be taken into account as a sign of goodwill. Perhaps, but it was precisely the “original Maastricht sin” of 2002-2003, when neither France nor Germany were taken to task for violating the treaty with their deficit overshoots that created the preconditions that later made it seem normal for many others to violate these limits as well (admittedly, this has to be brought into context with the artificial boom of 2002-2007 and the subsequent bust).

Nevertheless, the fiscal compact strikes as one of the more sensible EU regulations (although it is obviously difficult to enforce it against a big member nation). Not only because the euro’s survival essentially depends on it, but also because keeping government spending under control is good for the economy at large in any event.

If we have a gripe in this context, it is mainly that European governments are often inclined to raise taxes rather than cutting their spending. Both France and Italy currently stand as monuments to the folly of this approach.


weidmannJens Weidmann shortly after learning that France’s government will get away with a slap on the wrist.

Photo credit: Eric Piermont / AFP 



Below is Reuters reporting on Weidmann’s objections. Incidentally, he is evidently also one of only very few modern-day central bankers refusing to get carried away by deflation paranoia:


“Bundesbank President Jens Weidmann said the European Commission’s decision to give France longer to prove it is serious about economic reform and fixing its excessive public deficit risks damaging the credibility of the bloc’s budget rules.

“I would have hoped for clearer decisions. It would be unfortunate if the impression set in that (EU budget) rules are in the end up for negotiation and that budgetary consolidation can be perpetually put off by national governments,” the head of Germany’s central bank told France’s Le Figaro newspaper.

“France announced that it will not reach the agreed deficit goal in 2015 and has clearly put back the envisaged correction of its excessive deficit. For me, that does not strengthen the credibility of EU rules,” he said.

The European Commission warned France it could face sanctions if it did not implement the reforms needed to improve its public finances, competitiveness and growth prospects. France was to bring its budget deficit below 3 percent of GDP in 2015 under an already extended deadline set by EU ministers, but its draft 2015 budget delays that to 2017. Weidmann said France needed to introduce new measures to lower labor costs and make its labor market more flexible.

This week, France’s government proposed a pro-growth reform bill that is crucial for avoiding EU sanctions but risks being watered down by left-wing lawmakers angry with President Francois Hollande’s deregulation drive.

Fitch Ratings on Friday cut France’s sovereign rating to AA from AA+ saying the country’s revised deficit-reduction target was not enough to avoid a downgrade. Weidmann said when a big country like France, Italy or Germany did not honor its commitments, “we all have a problem.”

“It’s true that Germany should do more to create growth” but “more German investments, in infrastructure for example, would have very limited consequences in the rest of the euro zone,” he told Italian newspaper in the same interview also given to La Repubblica.

On the separate issue of inflation, Weidmann said lower energy prices were like “a little support program” because they increased people’s spending power and companies’ profits. The European Central Bank will decide early next year whether to take fresh action to revive the euro zone economy, but Weidmann has laid bare the entrenched German opposition to buying government bonds to do this. “There is no binding need to respond” to low inflation,” he told La Repubblica.


(emphasis added)

Apart from the things we already commented on above, we would also commend Weidmann for saying something sensible about the decline in oil prices. How can falling oil prices possibly not be good for the euro area? They clearly represent a net benefit for the entire region. And yet, reading some of the comments published in the financial press lately, one would think a lower oil price is some sort of calamity (because it could bring about lower “inflation”, natch). It may be a calamity for Venezuela, but surely not for Europe.

We also highlighted the little aside about Mr. Hollande above. As readers may remember, we have discussed just this problem before (see “Reform in France: Mission Impossible?”). On the one hand, Hollande no longer has anything to lose by becoming a reformer. He cannot possibly become any less popular than he already is. On the other hand, numerous vested interests in France are firmly arrayed against reform, especially on the political left, and not least in Hollande’s very own socialist party.

A major impediment is obviously the widespread economic illiteracy in these circles, but that is not the only problem. For instance, French unions, which wield political influence far exceeding their fairly small size, are no different from unions elsewhere: they don’t care about the unemployed, they only care about keeping their dues-paying members in clover.


debt-to-GDPContrary to France, Germany has actually managed to lower its pubic debt ratio, via Google, click to enlarge.


Hollande however seems serious this time, something that could be seen in the cabinet reshuffle in which Arnaud Montebourg was given the boot in favor of a far more market-friendly figure, Emmanuel Macron. Although Macron is a member of the socialist party, he is definitely not a member of its left wing. We have discussed Mr. Macron’s thankless task before.



It is refreshing to know that not all central bankers have completely lost their mind just yet. And yet, even the most well-meaning, conservative central banker is ultimately a central planner and is therefore confronted with a variant of the socialist calculation problem. In this case the problem is the literal impossibility for a bureaucrat to know the height of the natural interest rate. Still, given that we have to live with central banks for the time being, we prefer a conservative figure like Mr. Nein to the deflation-phobia infested figures seemingly running the show everywhere else.