BERLIN | Mon Oct 22, 2012 6:18am EDT
BERLIN Oct 22 (Reuters) - The European Central Bank's measures to support countries swept into the euro zone crisis maelstrom are raising risks to the euro system's balance sheet and re-distributing them among taxpayers, Germany's central bank wrote in its monthly report.
Two days before ECB President Mario Draghi addresses German lawmakers in Berlin, the Bundesbank reiterated its criticism of the ECB's decision to buy the sovereign bonds of struggling euro zone states, saying it was tantamount to fiscal policy.
"The more effectively monetary policy supports the financial systems of the crisis countries with its measures, the more risks are transferred to the balance sheet of the euro system and ultimately redistributed among all taxpayers of member countries," the Bundesbank wrote.
The Bundesbank said this was particularly problematic when the ECB implemented measures, such as bond buying, to support particular countries.
"Monetary policy thus takes on a stabilising function, that is originally a fiscal policy task," the Bundesbank wrote in its report. Democratically elected bodies should take on that task, the central bank wrote.
The Bundesbank also wrote that Germany's economy could contract slightly in the fourth quarter after expanding noticeably in the third as demand for German goods weakens.
"Signs are multiplying that a stagnation or even slight decline in gross domestic product in the fourth quarter could follow the noticeable economic growth in the third quarter of 2012," the bank wrote.
"While industrial orders from the euro zone have not fallen further after massively dropping in previous quarters, the expansion of demand from other countries has come to a standstill in the wake of a global economic slowdown."
Germany's traditionally export-oriented economy recovered swiftly from the 2008/09 financial crisis, outpacing its peers, and shrinking only once since the height of that crisis, by 0.1 percent in the fourth quarter of 2011.
The economy has remained fairly resilient to the euro zone crisis and appears to have defied expectations for a contraction in the third quarter.
The Bundesbank said it expected construction activity and private consumption to support the economy going forward.
"The economy will be supported further by the fact that construction activity is benefiting from the favorable financing conditions, the lack of alternative investments and increased uncertainty, and private consumption will continue to expand given noticeable increase in real income," the bank said.
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