'Reached its limits'

DW: Dr. Weidmann, the conventional monetary policy of the European Central Bank has reached its limits. The key interest rate in the eurozone is close to zero and the ECB now wants to purchase securitized debt. Is this a good strategy?

Jens Weidmann: I believe the main point - and there is consensus on the ECB governing council - is that monetary policy alone cannot solve the crisis in the euro area. This can only be resolved by politicians addressing structural problems. You are right to note conventional monetary policy - setting interest rates - has reached its limits. Everything we are discussing now is new territory for the central bank, the effectiveness of which is more uncertain than that of conventional instruments, not to mention the potential risks and side effects.

The longer this expansionary monetary policy lasts, the greater are these risks and side effects and the lower is the policy's effectiveness. It is therefore important that these policy decisions do not lead to a situation where politicians backtrack on implementing reforms, but rather ensure they are tackling problems at the roots.

Aren't there risk involved with the ECB's purchase of securitized products - risks that could again aversely affect taxpayers?

You know, the central bank's decision was controversial and the ECB's governing council discussed the latest resolutions at length. For me, there is a difference when assessing the risk associated with monetary policy. When decisions lead to a transfer of risky assets from banks' balance sheets to that of the central bank, and thus to the taxpayer, then the effect is a negative one compared to any incentives it may have.

We want to learn from the crisis and more stringently implement the principle of liability. That means people who make decisions must also assume responsibility for them. On the other hand, we're talking about a decision with a fiscal impact and the central bank needs to be very careful.

It was apparent at the conference in Milan that there was not much enthusiasm among the finance ministers for this new instrument of the central bank. Some of the ministers have said that if worst comes to worst, they do not want to bear the costs, as ECB President Mario Draghi would require them to. Should it worry us if the finance ministers do not play along?

I think this discussion highlights one thing most of all: It all comes down to taking risks. Decisions whether or not to take risks on behalf of the taxpayer should be left to the finance ministers.

What about the specter of deflation that was hanging over the conference in Milan? Do you see the danger of price declines in the eurozone? In Italy, for instance, prices fell by around 0.3 percent in August.

In the eurozone we are certainly experiencing a phase of very weak inflation. This is linked to various factors. Energy prices play a role, but so does the adjustment process that is required. Ultimately, this reflects the fact that competitiveness is being restored - price competitiveness in some crisis countries. This is a very different situation to that of a very negative and problematic deflationary spiral. Nevertheless, as a central bank we must keep an eye on inflationary expectations. Our definition of price stability is inflation slightly lower than two percent. Of course it will be of concern to us if citizens' inflation expectations no longer align with those of the central bank.

Two years ago, the Bundesbank received plaudits from many German economists for openly opposing massive purchases of government debt by the ECB. What will be the Bundesbank's reaction this time around to the unconventional program of buying securitized loans? Do you support the ECB's plans or oppose them?

My position - after all, it's not the Bundesbank that is represented on the governing council, but me personally - is well known. I have always been very consistent so that I may never have to violate confidentiality requirements.

So you voted no?

I won't say. It is not important for me to receive applause from one side or the other, but to do what I believe is right. This is monetary policy with a relatively narrowly defined mandate and one that is clearly focused on the principle of price stability. At the same time, you have to admit that monetary policy currently finds itself in a difficult situation, as inflation is low and far off the central bank's target.

Dr. Jens Weidmann (46) has been president of Germany's Bundesbank since May 2011. He represents Germany on the governing council of the Frankfurt-based European Central Bank, which sets monetary policy for the 18-nation eurozone.