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German central banker: ECB must not print money

Associated Press

FRANKFURT, Germany (AP) — Germany's top central banker warned Wednesday that the European Central Bank should not create new money as a way of solving the eurozone debt crisis.

In the text of a speech in Berlin, Jens Weidmann said that "one idea must finally be put aside, that of getting the needed money from the printing press."

Weidmann heads Germany's Bundesbank central bank and also sits on the ECB's 23-member governing council.

He said making the central bank support government finances would cost it its independence. It would also cost it its credibility as an inflation fighter, Weidmann says.

Some economists say the ECB's power to create money and buy large amounts of government bonds is the only backstop that can convince markets European countries can pay their debts. European officials have rescue funds with top financing of euro500 billion ($659 billion), but much of that money is already committed to bailouts of Greece, Portugal and Ireland and the funds are not big enough to rescue Italy, the most recent focus of the debt crisis.

Central banks do not actually print new bills when they expand the money supply. They can buy bonds from banks and simply credit the banks' central bank reserve account with money that did not exist before. The European Central Bank has made limited purchases of government bonds, but has always withdrawn an equivalent amount of money by taking bank deposits.

Weidmann is a leading critic of the idea of putting the ECB behind Italy's finances, saying that creating new money would violate the bank's legal mandate. The EU treaty requires it to fight inflation as its first priority. Creating new money can be inflationary, although both the U.S. Federal Reserve and the Bank of England have done it to try to stimulate economic growth.

Weidmann and others also argue that the bank would compromise its independence by subordinating monetary policy to government budget needs.

"This independence is lost when monetary policy is yoked to the wagon of fiscal policy — and then loses control over price stability," Weidmann said.

New ECB president Mario Draghi has said governments must fix their finances and convince bond markets they are creditworthy, and not wait for a central bank rescue.

Analysts who follow the European Central Bank say that Weidmann's repeated opposition to large-scale bond buys could deter any change of course by the bank, since objections from the central bank in Europe's largest country would send a mixed message to markets.

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