Bundesbank warns of weaker incentives for sound finances

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German central bank chief Jens Weidmann said on Monday that while measures to solve the eurozone debt crisis were justifiable in the short term, they could weaken incentives for sound public finances.

In a statement prepared for delivery at a parliamentary hearing, Bundesbank chief and European Central Bank governing council member Weidmann said that "from an economic point of view" the European Financial Stability Facility (EFSF) and the aid programmes for Greece were "justifiable all in all, even if the incentives for solid public finances have been weakened."

Nevertheless, the "fundamental framework of currency union should not be altered," Weidmann insisted.

And the fundamental principle that every country is responsible for its own finances and not be bailed out by fellow members "must remain an integral part of currency union," he said.

Weidmann reiterated his concern that an agreement reached by eurozone leaders July 21 to expand the powers of the EFSF represented a "further major step" towards the pooling of debt within the 17-nation bloc.

He added it could lead to a "reduction of discipline through the market without bolstering control over national fiscal policies."

And allowing the EFSF to buy government bonds on the secondary market would "reduce incentives for appropriate fiscal policy," he said.

© 2011 AFP

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