Germany warns of asset bubbles, rebuffs IMF idea to stir inflation in Europe with bond program

BRUSSELS – Germany’s finance minister on Monday issued a stark warning that global central banks’ efforts to inject more liquidity into the financial system are feeding asset bubbles — which could eventually burst and cause the next crisis.

Wolfgang Schaeuble also rejected a recommendation by the International Monetary Fund that the European Central Bank should resort to large-scale bond purchases — of the kind the Federal Reserve is making — to help growth and protect the 18-nation eurozone from deflation.

“We don’t have too little liquidity in financial markets but rather too much,” Schaeuble said after a meeting of European finance ministers in Luxembourg.

“All experience of economic history tells us that such situations lead to bubbles,” he added, noting that the low interest rates in developed economies are pushing investors into riskier markets including real estate.

Germany has long been aggressive on combating inflation and cautious about big stimulus programs.

The IMF on Thursday recommended that the ECB should make large-scale purchases of assets such as bonds if “inflation remains stubbornly low.”

The eurozone’s inflation rate stands at 0.5 per cent, well below the ECB target of 2 per cent. A deflationary slump, in which prices fall persistently, would threaten to choke economic growth.

A top ECB official said the IMF recommendation was not at odds with the central bank’s clearly stated policy that it was prepared to do yet more “in case inflation would prove too low for too long.”

But executive board member Benoit Coeure said the ECB’s current policies — which include increasing liquidity in the financial system, low interest rates and facilitating lending to the economy — would be enough for now. That suggests large-scale bond purchases are not on the agenda.

“It is not needed today,” he said.

ECB President Mario Draghi has hinted the bank would be prepared to conduct a large-scale bond buying program, but that unprecedented step would be fraught with legal and practical uncertainties.

In the United States, the Fed has had some success with such a bond purchases program, dubbed “quantitative easing.” Its economy is recovering and the Fed is now reducing, or “tapering,” the program.


Follow Juergen Baetz on Twitter at