EUROPEAN CENTRAL Bank president Mario Draghi has challenged German concerns over ECB sovereign bond-buying, warning that a failure to tackle euro zone market distortions would “undermine” the single currency.
After meeting chancellor Angela Merkel in Berlin, Mr Draghi told captains of German industry that the ECB’s bond-buying programme would stabilise the euro zone until further political steps are agreed.
Mr Draghi tackled head-on German criticisms – voiced by the Bundesbank and leading media outlets – that the ECB’s programme breaches its narrow mandate on price stability and opens the door to ECB state financing and a higher risk of inflation.
He dismissed the alternative proposed by his German critics – no ECB bond market intervention – saying that the answer to securing euro zone stability could not lie in saying “no to everything”.
“The greatest risk to stability is not action, but inaction. This is why the ECB has acted,” said Mr Draghi, saying “exceptional times . . . call for exceptional measures”.
In a speech to a meeting of Germany’s Industry Federation, he hinted that the Bundesbank’s price stability mandate – Germany’s postwar response to 1920s hyperinflation and the model for the ECB’s own mandate – was not what the euro zone needed now.
In an apparent swipe at Germany’s historical inflation trauma, the Italian-born central banker said: “We cannot always look to the past for answers.”
“I understand that some observers in this country have concerns about the medium-term implications of this policy,” said Mr Draghi.
“We are steadfastly committed to our mandate to maintain price stability. And the measures we have announced fully support this commitment.”
He said the ECB had decided to act, despite protestations by Bundesbank president Jens Weidmann, because “unfounded fears” about the euro zone’s future had led to unmanageable divergence within the bloc. While some mortgage interest rates in Spain neared 8 per cent, he said, similar home loans in Germany cost 3 per cent.
“The ECB’s governing council therefore faced a choice: to accept this situation and allow the singleness of its monetary policy to be undermined; or to take actions within its mandate to restore the normal transmission of monetary policy across all parts of the euro area,” he said. “We decided in favour of the latter.”
The ECB programme, dubbed outright monetary transactions (OMT), has been sold as conditional on political reform, something Mr Draghi repeated yesterday.
The planned sovereign bond buy-ups would take place on secondary bond markets only – with ECB money passing to investors, not governments – thus would not classify as direct state financing.
The positive market reaction to the OMT announcement, he said, showed that investors were “fundamentally confident” in the currency bloc and “ready to reinvest at the first signs of stabilisation”.
The ECB has indicated that the OMT programme could operate without an upper financial limit. According to German media reports yesterday, however, both ECB and Bundesbank lawyers are inquiring into the limits of OMT’s scale and duration under EU law.
