Gerd Hausler, a member of the Bundesbank central council, said there was a fundamental tension between promoting Germany as a financial centre and safeguarding the currency. 'The central bank, responsible as it is for monetary policy, has only one option: it must give priority to upholding monetary stability,' he said.
The Bundesbank has been able to relax its hostility to money market funds because its minimum reserve requirements had been reduced to such a level that the creation of these funds, which are outside the reserve requirements, would no longer undermine its own function. Money market funds give savers access to higher short-term interest rates.
'But ceasing to oppose one issue does not necessarily imply becoming enthusiastic about it,' Mr Hausler said. 'We thus see no need to promote money market funds from our side.'
He underlined the Bundesbank's continued scepticism about short- dated government paper, which is one of the main driving forces behind money market growth. Extensive use of short-dated securities such as Treasury bills can hamper monetary definition and targeting, and can cause a fiscal mismatch between long-term government expenditure funded by short-term paper, he said.
Given Germany's particularly bad experiences with short-term financing, which twice this century ended in the collapse of the currency, the Bundesbank must argue for restraint, even though a financial market policy geared to the preferences of foreign investors would come to precisely the opposite conclusion, he said.
Mr Hausler said the process of greater economic integration in Europe would force those central banks actively promoting their national financial centres to concentrate on monetary stability. There would have to be a division of labour, he said.
He also said attempts to get around the contradiction between monetary stability and promoting financial markets by encouraging offshore banking facilities held considerable potential risks, not least in impeding the central bank's monetary management.Reuse content