Officials from the European Central Bank are pushing back against calls from the United States and the International Monetary Fund to offer more support to the struggling economies of the 17 countries that use the euro and indebted governments.
Jens Weidmann, Germany's top central banker and a member of the ECB's governing council that sets interest rates, said in a speech Monday that steps such as lower interest rates and more central bank credit for the financial system were not the solution to the debt burdens weighing on national governments and the economy.
"Monetary policy is not a panacea and central bank firepower is not unlimited," particularly within the constraints of a currency shared by 17 countries, Weidmann said.
In recent days, the International Monetary Fund, which loans money to countries in financial trouble, and the Organization for Economic Cooperation and Development, a group of mostly rich countries, have urged the ECB to take further steps to ease the crisis. At last weekend's IMF meeting in Washington, DC, U.S. Treasury Secretary Tim Geithner also called for the ECB to join in support for countries as they push through pro-growth reforms.
Weidmann is regarded as one of the bank's more hawkish officials, meaning a tough stance against inflation and less willingness to cut rates and take steps to expand the money supply.
ECB head Mario Draghi said Friday that the ECB's council had not discussed the measures proposed by the IMF. He has said it's now up to governments to deal with the crisis by fixing their budgets and improving growth and exports.
Weidmann forcefully underlined the banks resistance to do more, saying that the central bank system in Europe has already deployed strong measures against the crisis and can't let its actions become a substitute for inaction by governments on budget-cutting and pro-growth reforms.
"The central banks of the Eurosystem have already done a lot to contain the crisis," he said in the text of a speech before Economic Club of New York. "Now we have to make sure that by solving one crisis, we are not preparing the ground for the next one."
The ECB and the eurozone's 17 national central banks make up the Eurosystem.
The ECB has already cut interest rates to a record low of 1 percent, which lowers borrowing costs for businesses, and has flooded the banking system with more than (EURO)1 trillion ($1.3 trillion) in cheap, 3-year loans. That removed the fear of bank failures in the short term and led to easier borrowing for indebted governments as some banks used the money to buy government bonds.
Much of the calming effect of the money infusion has worn off however over the past several weeks, with investors again demanding higher rates to lend to Italy and Spain. Those countries are the recent focus of the debt crisis that has seen Greece, Ireland and Portugal turn to other eurozone countries for emergency loans.
Weidmann said governments have to cut their deficits, and that doing that will help restore confidence. More central bank intervention risks inflation and excessive risk-taking by bankers flush with cheap money.
Central bank measures only buy time for governments to fix their finances, he said.
"The analgesic we administer comes with side effects," Weidmann said. "And the longer we apply it, the greater these side effects will be, and they will come back to haunt us in the future."