Bloomberg News

Stark Says Central Banks Must Keep Focus on Price Stability

November 30, 2011

Nov. 29 (Bloomberg) -- European Central Bank Executive Board member Juergen Stark said central banks must guard their independence and keep their focus on price stability or risk being dominated by free-spending governments.

“Crucial challenges in this regard include the risk that monetary policy is overburdened by fiscally dominant regimes caused by government’s irresponsible fiscal behavior and unsustainable public finances,” Stark said today in the text of a lecture hosted by the Federal Reserve Bank of Dallas.

The ECB has resisted calls for it to step up purchases of government bonds to cap bond yields, saying that would compromise its independence and credibility. Investors are losing confidence in Europe’s ability to contain the two-year- old debt crisis and are dumping bonds across the 17-nation euro region, driving up borrowing costs.

Monetary policy also risks being “dominated by financial stability concerns, implying that price stability would be subjugated by financial stability,” Stark said in Dallas. To make policy more “robust,” Stark said central bankers “should recognize the centrality of price stability for monetary policy.”

While the ECB is buying the bonds of debt-strapped governments such as Italy and Spain, it says the purchases are limited, temporary, and aimed solely at restoring the effectiveness of its interest rates on financial markets. It has bought 203.5 billion euros ($271 billion) of bonds since the purchase program began in May last year.

Weaker Balance Sheets

“The crisis is still on-going,” Stark said in a lecture about “Globalization and Monetary Policy: From Virtue to Vice.” Since 2007, the crisis has spread to “sovereigns with weaker balance sheets, which in turn contributed to increasing the vulnerability of the core financial system even further.”

With renewed prodding from the U.S., European leaders are pondering a fifth “comprehensive” fix after an October blueprint failed to stop a widening rout in Italian markets or quell speculation that France will lose its top credit rating. Germany is pushing for governance changes at a summit next week that would tighten enforcement of budget rules, a move that might make it easier for the ECB to step in.

“In recent months, this negative and self-reinforcing dynamic of adverse feedback loops between weak sovereign and financial sector balance sheets has been all too apparent in parts of the euro area,” Stark said.

Stark used the bulk of his speech to comment on the impact of globalization on monetary policy during the financial crisis. Global forces require “much greater economic policy co- ordination among monetary union members,” he said.

He differed with the U.S. policy approach, which has given equal weight to maximum employment and price stability.

“The ECB has never subscribed to the view that monetary policy has a primary role to play in the management of aggregate demand and we think that this element of the pre-crisis monetary policy paradigm should be revised,” he said.

--Editors: Christopher Wellisz, Gail DeGeorge

To contact the reporter on this story: Steve Matthews in Atlanta at

To contact the editor responsible for this story: Chris Wellisz at

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