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Euro woes not over, says crisis-wary Bundesbank

President of German Bundesbank Jens Weidmann reacts on the podium during the Frankfurt Euro Finance Week in Frankfurt November 19, 2012. REU
President of German Bundesbank Jens Weidmann reacts on the podium during the Frankfurt Euro Finance Week in Frankfurt November 19, 2012. REU

By Eva Kuehnen and Paul Carrel

FRANKFURT (Reuters) - A wary German central bank said on Tuesday it had set aside billions more euros against what it deems risky European Central Bank moves, and criticized France directly for "floundering" in its reform drives.

Presenting Bundesbank 2012 results, Jens Weidmann, the bank's chief, said the euro zone crisis, which has eased as a result of ECB funding promises, was not over. He urged governments to tackle the roots of their troubles with reforms.

Weidmann, a member of the ECB's Governing Council, opposed the bank's yet-to-be-used bond-buy plan agreed last September and believes euro zone governments must shape up their economies to exit the crisis rather than looking to the ECB for help.

"The crisis that we are facing is a crisis of confidence, and this confidence cannot be gained if we postpone the tackling of the root causes of the crisis," he told Reuters in a television interview.

Stressing that "the crisis is not over despite the recent calm on financial markets," Weidmann earlier told a news conference there was uncertainty about the reform course in France, Italy and Cyprus.

"The reform course in France seems to have floundered, in Italy it has been brought into question by the elections and in Cyprus (which is struggling to get a bailout) the situation is especially unclear."

The ECB's other German policymaker, Joerg Asmussen, late last month urged France to take "concrete and measurable" steps to bring down its budget deficit, telling Reuters Paris faced a test of its credibility and must come as close as possible to its deficit goal this year.

Weidmann echoed Asmussen's call.

"I think France has a role to demonstrate that we stick to the rules and that we continue on the consolidation path," the Bundesbank chief told Reuters television.

France is the euro zone's second largest economy after Germany, with which it has forged a partnership for decades.

ECB RISKS

The Bundesbank is concerned about risks the ECB has taken on to help banks through the crisis, for example by accepting lower-rated assets in return for cash, exposing it to larger losses if a bank fails to repay.

Weidmann expressed concerned that a debt deal last month between the ECB and Ireland over failed Anglo Irish Bank showed the ease with which the ECB can fall into the "clutches" of fiscal policy - and area the Bundesbank does not wish it to go.

The Irish government struck the deal with the ECB to switch a costly promissory note used to pay for the rescue of the failed bank into less expensive sovereign debt

With this kind of exposure concerning the Bundesbank - which has long been one of the world's most conservative central banks - it said it had increased its risk buffers by 6.7 billion euros ($8.3 billion dollar) to 14.4 billion euros.

"We must be careful not to further blur the borders between monetary and fiscal policy," Weidmann told Reuters.

The German also struck a different note from his ECB boss, President Mario Draghi, on the issue of what should be done to ensure that the benefits of ECB monetary policy reach everyone in the bloc.

Draghi says the bank's top priority is to enhance its so-called monetary policy 'transmission mechanism', so that low interest rates are sent to all corners of the 17-country euro zone. He is concerned that small- and mid-sized firms are not able to access funds to grow.

But Weidmann appeared less worried.

"A functioning transmission mechanism doesn't mean that we have the same interest rate for everybody in every country in Europe," the German central bank chief said.

"Fine tuning sectoral financing conditions is not a task for monetary policy. There are other instruments to deal with this, the governments do have specific banks that have been set up for this purpose, like the KfW in Germany. And we should first look to their capacity to tackle the issue."

CONFIDENCE LOST

Weidmann said the euro zone crisis was the biggest threat to Germany, Europe's economic powerhouse.

The country's economy expanded robustly during the first two years of the euro zone crisis but growth slowed last year and the economy shrank in the fourth quarter.

Most economists still see the country escaping a recession, defined as two consecutive quarters of contraction, by growing weakly in the first quarter before regaining momentum.

"The German economy is structurally in good shape," Weidmann said, though confidence had been hit by the euro zone debt crisis, which posed the biggest risk to a recovery.

He nonetheless expected growth to strengthen as the year progresses, assuming there are no further shocks to confidence.

"In the short term, we in the euro area have, if anything, declining inflation risks," Weidmann said, adding that in the medium-term it was important to leave no doubt about the 'stability orientation' of ECB monetary policy.

(1 euro = $1.305)

(Editing by Jeremy Gaunt.)

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