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Bundesbank's Weidmann says ECB still has room to act

President of Germany's Bundesbank Jens Weidmann arrives for the Frankfurt Finance Summit in Frankfurt March 19, 2013. REUTERS/Lisi Niesner
President of Germany's Bundesbank Jens Weidmann arrives for the Frankfurt Finance Summit in Frankfurt March 19, 2013. REUTERS/Lisi Niesner

BERLIN (Reuters) - The ECB still has room to cut its already record low interest rates, Bundesbank chief Jens Weidmann said in a newspaper interview on Thursday, and hit out at France's deficit-reduction efforts.

The European Central Bank cut its benchmark rate to 0.5 percent last Thursday and its President Mario Draghi has since said it would monitor incoming data closely and be ready to cut rates further, including its current zero interest deposit rate.

Asked if the ECB had fired its last cartridge, Weidmann told the Westdeutsche Allgemeine Zeitung: "Monetary policy is still capable of action. There is no doubt that we must keep an eye on the risks of negative real interest rates."

Weidmann, a staunch defender of the ECB's mandate to contain inflation, said the ECB was right to pursue a very expansive monetary policy given the weakened economic outlook in the euro zone and falling inflation.

But he warned: "It is important that the interest rate is quickly normalized when the situation improves. A low interest rate is certainly not a permanent solution."

He reiterated his view that the effects of cutting the main refinancing rate "should not be overestimated at the moment".

Weidmann, a member of the ECB's Governing Council, also said European countries should not ease up on reforms and questioned whether any stimulus packages to tackle high youth unemployment would create sustainable jobs.

Many of Europe's policymakers are starting to see unemployment as a crisis in its own right, rather than something that will resolve itself when the economy improves.

Weidmann said only competitive companies and a healthy economy would offer young people long-term prospects, stating "a pause in reforms would therefore not be helpful."

"Now that we have stricter rules on reducing the deficit, we should not raise a question-mark over their credibility by exploiting their flexibility," he added.

FRANCE BASHING

Weidmann reiterated his criticism of France's failure to stick to its deficit-reduction targets, saying the euro zone's second-biggest economy had a key role in maintaining the credibility of the bloc's efforts to consolidate budgets.

The European Commission last week gave France two more years to meet its budget deficit target because of its poor economic outlook.

Weidmann said the fact France would still have a deficit of around 4 percent this year, which was even set to rise next year, did not indicate that it was making an effort to save.

"To win back confidence, we cannot just write down a set of rules and promise to keep them in the future; we have to fill them with life."

French President Francois Hollande and German Chancellor Angela Merkel find themselves on opposite sides of the debate over whether to promote job creation and growth at the expense of austerity, leading to suggestions that their relationship has soured.

Speaking to reporters at a conference in London, German finance minister Wolfgang Schaeuble brushed off Weidmann's comments. "Mr Weidmann has his view of French politics, but that is not the decision of the European Commission," he said.

(Reporting by Michelle Martin and Sarah Marsh in Berlin, Marc Jones in London; Editing by Ruth Pitchford)

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