Merkel stresses need for fiscal reform

GERMAN CHANCELLOR Angela Merkel has insisted no actions by the European Central Bank can take the place of fiscal reform among…

GERMAN CHANCELLOR Angela Merkel has insisted no actions by the European Central Bank can take the place of fiscal reform among crisis-hit euro zone members.

After a meeting in Madrid, Spanish prime minister Mariano Rajoy declined to answer questions on the European Central Bank’s new bond-buying programme, announced simultaneously in Frankfurt.

The German leader gave indirect support for the move, saying she believed the ECB was “acting independently and within the framework of its mandate”.

“In the end, all other measures, such as those that serve monetary stability, which is what we’re talking about with reference to the ECB, cannot replace political actions,” said Dr Merkel, who faces rising criticism at home over the ECB’s actions.

“It is very important that we do our homework as politicians and do it so that markets regain confidence.”

She declined to comment on whether she felt the growing gap in borrowing costs between euro zone states was a rational market reaction to risk.

German bond yields are “very, very low”, she said, while others’ yields are “very, very high”.

Ahead of their meeting yesterday, Mr Rajoy said markets had failed to reward Spanish reforms to date with a reduction in borrowing costs. As a result, he said, “our efforts have amounted to nothing”.

“The reforms and austerity measures have had no immediate effect, something that is difficult to explain to citizens,” he told German newspaper Frankfurter Allgemeine.

He said this justified his call for European partners to move away from “orthodox thinking”, support Spain and, with it, the euro.

“When someone makes great efforts and has the same goal, namely budget consolidation, you have to give them a chance to make headway,” said Mr Rajoy. “It’s important in life to have principles. But sometimes it’s also good to be flexible.”

The ECB’s flexible view of its mandate has prompted critical reaction in Germany, where nearly one in two people say they have little or no confidence in the bank’s president.

Some 30 per cent of survey respondents told Stern magazine they had little trust in ECB president Mario Draghi, with 12 per cent saying they had none.

Just 18 per cent of those quizzed by the Forsa polling agency held Mr Draghi in high esteem.

According to a separate, long-term survey, 73 per cent of Germans fear the cost of the crisis will land on taxpayers’ shoulders and two-thirds expressed concern that the euro zone crisis was endangering the common currency.

In Germany’s hawkish mainstream economic and political circles, the ECB programme was condemned yesterday as a nail in the coffin of the Frankfurt bank’s inflation-fighting mandate.

Former ECB economist Otmar Issing said buying up sovereign bonds “politicised” the ostensibly independent central bank. “The idea of the euro was that it would be an apolitical currency,” he said -in Prague.

“If this is no longer the case, the founding principle of the euro has been compromised.”

A Bavarian backbencher in Dr Merkel’s government has urged Berlin to take the ECB to the European Court of Justice.

“Today’s ECB decisions breach the ban on state financing in article 123 of the European treaties,” said Dr Peter Gauweiler.

“The purchase of bonds must be stopped and . . . ECB voting rules changed to reflect the capital contribution of its members.”

Dr Merkel’s Free Democratic Party junior coalition partner attacked the programme and vowed to pass a resolution to that effect at its next party conference.