Weidmann says ECB can only help in short-term, Spain needs to do more

Whereas monetary policy can influence so-called aggregate demand, or economic activity, in the short-term, it cannot boost growth prospects in a permanent fashion, Bundesbank president Jens Weidmann said on Monday.

He was speaking at the Annual Financial Conference organised by the Spanish Association of Financial Markets (AMF), in Madrid, Spain.

To drive home his point, he stressed the fact that the Eurozone’s long-run rate of potential growth is now estimated to be just 1%.

Potential growth is estimated at just 1%

Critically, in a reference to the hurdles which any attempt at full-blown quantitative easing might face, he called attention to the possible legal limitations.

In his speech Weidmann centred on the need to remedy the excessive rigidity of labour markets in Europe, explaining that emphasis should be placed on protecting workers, not job posts. In response to a question from the audience he added that he was in favour of a ‘safety net’ for those who lost their jobs but not of defending rigid labour markets.

The need for the above was even more important inside a monetary union, such as the single-currency area, he argued. Gaps in prices and productivity between countries need to be closed.

Were the bureaucratic hurdles to be removed the [Eurozone’s] gross domestic product would gain 10 percentage points. It probably accounts for the negative differential in labour productivity between the US and Europe.

More measures are needed in Spain

Likewise, a more fertile ground for risk capital was needed, so that innovative companies could grow, instead of constantly funnelling capital to companies which were not viable.

On the subject of whether Spain would be able to meet its targets for the public deficit, Weidmann turned to Spanish finance minister Luis de Guindos to say: “Luis, I will paraphrase what you told me: this year, yes, but looking out to next year more measures are needed.”

He also commented on the risk of deflation, noting how investment plans continue to go ahead, proof in his opinion that what we are witnessing is dis-inflation, not deflation.