Jens Weidmann: ‘It is important that all measures, including additional ones, are clearly limited in time’ © Reuters

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The head of Germany’s central bank has warned that the economy risks becoming overly reliant on the massive fiscal and monetary support provided since the coronavirus pandemic struck and called for it to be scaled back soon.

Jens Weidmann, president of the Bundesbank, also criticised the EU’s plan to issue €750bn of new debt for its new recovery fund, warning that it risked creating “a kind of debt illusion” because the money would not be included in national debt figures.

His comments in a speech on Wednesday evening signal that a fresh north-south split could be opening up in Europe over the pace at which the exceptionally loose fiscal and monetary support should be withdrawn, as countries like Germany rebound faster from the pandemic than others such as Spain.

European countries have vastly increased their debt levels to finance measures that shield their companies and workers from the impact of the pandemic, while the European Central Bank has bought hundreds of millions in bonds to keep interest rates low.

Mr Weidmann, who is well known for being one of the most hawkish members of the ECB governing council, said that most of these policies had been justified. But he warned: “It is important that all measures, including additional ones, are clearly limited in time.”

“The state acted quickly and comprehensively in the corona crisis,” he said. “Finding the exit from crisis mode will be just as important.”

He went on: “Fiscal policy should not get used to a lax course, nor should it rely on interest rates to remain so low in the long run. That is why it is important to reduce the high debt ratio after the crisis.”

The German government recently expanded its package of economic support measures, including extending by a year its Kurzarbeit furlough scheme, under which workers are sent home and receive about two-thirds of their pay from the government. France and Spain have also recently extended their furlough schemes. 

In addition, Germany and other European governments are providing cheap loans, equity investments and tax breaks for struggling companies, while temporarily exempting many of those hit by the pandemic from having to declare insolvency.

Mr Weidmann said there were economic benefits in policies such as furlough schemes, but he cautioned that if they lasted too long, they “could also tie workers to companies that have no future and freeze structures that are obsolete”. He also warned politicians against trying to “interfere too much in corporate decisions, for example in the case of new investments”.

The Bundesbank boss has long been a critic of the ECB’s bond-buying policy. He warned on Wednesday that while he supported the move to buy more assets in response to the pandemic, the risks of the policy were “high”. 

“In view of the high national debt, the pressure on the central banks to adhere to the loose monetary policy longer than necessary could increase,” he said. 

“After the crisis, the emergency monetary policy measures would have to be scaled back again,” he added. “In addition, it must be clear that if the price outlook requires it, then monetary policy as a whole must be normalised.”

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