jens weidmann : the monetary union as a community of stability speech by dr jens weidmann, president of the deutsche bundesbank, at the bundesbank ’ s parliamentary evening, regional office in hamburg, mecklenburg - west pomerania and schleswig - holstein, hamburg, 29 august 2013. * * * introduction madam president, ladies and gentlemen i am glad of this opportunity to speak to you at this parliamentary evening. i would like to begin with a short anecdote about the economist who lost his keys. one night a policeman notices an economist standing beneath a lamp - post looking for something. the policeman asks if he can be of assistance, to which the economist replies, “ i ’ ve lost my keys and can ’ t find them. ” the policeman asks, “ are you sure this is where you lost them, sir? ” and the economist answers, “ no, i lost the keys over by the car, but the light is better here. ” people like to tell this story when rebuking economists because they didn ’ t see the financial and debt crisis coming. indeed, financial stability reviews and other economic studies prior to the crisis do contain references to shifts within the financial system. yet the macroeconomic risks that this development on the financial markets produced did not receive nearly as much attention as they warranted. this is because the economic models they used had blind spots. as a result, the financial markets were rudimentarily modelled at best. looking back, one might say that impressive progress has been made in financial economics and macroeconomics over the past decades – but unfortunately they have advanced independently of each other rather than alongside each other. it is only recently that researchers have started to focus more strongly on the interaction between the financial sector and the real economy. yet that isn ’ t the only moral of the story of the lost keys. even when combating the crisis, there is a risk that we only see the obvious, what ’ s right in front of our noses – like the fluctuations in the financial markets. but if we want to overcome the crisis once and for all, we have to illuminate the dark corners as well. only if we identify and remedy the weaknesses in the framework of monetary union will we ensure that the monetary union remains a community of stability. for this reason, my speech this evening consists of two parts. first, i would like to examine the main features of the current monetary union framework. then i will discuss the options we have for

end to the preferential treatment given to sovereign risk in bank balance sheets. banks ’ substantial exposure to sovereign risk – which even increased in bis central bankers ’ speeches some quarters during the crisis – owed something to the 0 % risk weight for government bonds and the absence of upper limits for lending to governments. putting an end to this practice of privileging sovereign debt over corporate loans would also represent a major step towards making lending to businesses more attractive again. that ’ s not the only regulatory measure that ’ s of decisive importance. higher capital requirements are key to ensuring that banks can withstand greater losses under their own steam, thereby shifting risk back to shareholders. this process got underway with the basel iii regime and now needs to be rigorously implemented. having a mechanism that facilitates the orderly resolution or restructuring of large, international and highly interconnected banks in the event of difficulties – otherwise known as the “ too big to fail ” problem – is equally important in future. progress has been rather mixed so far on the implementation of internationally agreed standards for resolution regimes. role of monetary policy finally, i would like to turn to central banks ’ role in resolving the crisis. the causes of the crisis are structural. this is why only structural measures can resolve the crisis. monetary policy – that is, the eurosystem – has already done a great deal to contain the crisis. the eurosystem has cut key interest rates and it is supplying banks with practically unlimited amounts of liquidity. on top of this, in july ecb president mario draghi provided forward guidance on the ecb ’ s future monetary policy stance, indicating that key interest rates would remain at present or lower levels for the foreseeable future. though the design details of these monetary policy measures are debatable, the action itself was essentially correct. however, the longer the phase of low interest rates continues, the blunter the loose monetary policy instrument becomes ; risks to financial stability increase and the exit becomes more difficult. the eurosystem also intervened in the government bond markets, however, and raised the prospect of further interventions subject to certain conditions. you will be aware that i take a critical view of these steps. for by purchasing government bonds of countries that are finding it difficult to place their bonds in the market, central banks are redistributing the burden of unsound fiscal policy throughout the euro area. ultimately, this is tantamount to mutualising liability for the individual countries ’ debts via the central bank. doing so