German "wise men" warn ECB is risking credibility

Wed Nov 9, 2011 8:06am EST
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By Alexandra Hudson and Veronica Ek

BERLIN (Reuters) - Germany's "wise men" panel of economic advisers warned the European Central Bank it risks losing credibility by buying the bonds of heavily-indebted euro zone states, and that monetary and fiscal policy are becoming worryingly blurred.

The group, which advises the German government, said in a report published on Wednesday: "The bond buying program dismantles market discipline without establishing any political discipline in its place."

In blurring monetary and fiscal policy, the report said, "the ECB is jeopardizing its credibility, because it is falling under the suspicion of monetizing sovereign indebtedness".

Germany strongly objects to the bond-buying strategy but the ECB's new president Mario Draghi has signaled the bank is ready to carry on buying bonds of troubled euro zone governments.

The wise men said they expected the bank to make a further cut in the key euro zone interest rate to 1 percent by the end of 2011, and that rates would remain at this level throughout 2012.

In the report, the panel suggested a different method for increasing the euro zone's capacity to prevent contagion from the debt crisis, should the 440 billion-euro European Financial Stability Facility (EFSF) not suffice.

In what the "wise men" said would be a departure from current models of securing debt with ever more borrowing, they advised setting up a "European Redemption Pact".

This would involve countries with sovereign debt above 60 percent of GDP pooling their excess debt into a redemption fund with common liability. They would commit to reforms and see their debts repaid over 20-25 years.   Continued...

<p>New European Central Bank (ECB) President Mario Draghi attends a meeting on the second day of the G20 Summit in Cannes November 4, 2011. REUTERS/Yves Herman</p>