EUROPEAN CENTRAL Bank president Mario Draghi has told euro zone central bankers that solving Ireland’s banking debt issue will require more than just “legal discussion”.
According to this morning’s Der Spiegel magazine, Mr Draghi “did what he seldom does: he got loud” when dinner-table talk among ECB governors earlier this month turned to Irish banking debt.
“One cannot always answer such questions through purely legal discussion,” said Mr Draghi, according to the magazine.
Those remarks, combined with last week’s promise in London to “do whatever it takes to preserve the euro”, have sparked concern among northern euro zone central bankers. They see a pattern in Mr Draghi’s remarks: to reinterpret the ECB’s mandate in a broader fashion, allowing greater flexibility in how it defends the common currency.
Such a move would be welcomed by France, southern Europeans and crisis countries, while putting Mr Draghi at odds with the narrower interpretation of the ECB’s mandate – euro price stability – held by northern euro zone members led by the Bundesbank.
Der Spiegel dubs the growing tension “Frankfurt v Frankfurt”. The governing council will have a chance to revisit the matter of Irish debt at its non-interest rate meeting on Thursday, which is expected to be dominated by talk of Spanish bond-buying.
Before then Mr Draghi will meet Bundesbank president Jens Weidmann, whose support is crucial for any multipronged plan to cut Spanish and Italian bond yields.
Mr Weidmann bases his opposition to bond-buying both on theory – it lies outside the ECB mandate – and on practice: a Spanish bond buy-up last August saw a one-point drop in interest rates for Madrid, only for the rate to rise again once the ECB retreated from markets.
Earlier ECB bond-market interventions prompted the departure of Mr Weidmann’s Bundesbank predecessor, Axel Weber, and ECB vice-president Jürgen Stark.
Now Mr Draghi is expected to propose driving down interest rates by having Europe’s bailout funds buying government bonds on the primary market while Frankfurt buys on the secondary market.
The central banks of Finland, the Netherlands and Belgium share the Bundesbank’s view that bond buy-ups skirt the forbidden territory of state financing through ECB printing presses.
But they have just one vote each on the 23-seat ECB governing council and, analysts believe, cannot rely on political support from Berlin or Paris.
On Friday German chancellor Angela Merkel and French president François Hollande echoed Mr Draghi’s words of support for the euro and urged EU politicians and institutions to “meet their obligations in their own area of competence”.
Dr Merkel reiterated her remarks yesterday after talking to Italian prime minister Mario Monti. Markets view this as a tacit nod of political approval from the euro zone’s economic heavyweights for further bond-buying. Preparations for such a programme are completed, according to weekend reports in Germany.
“Nobody wants that the ECB has to intervene on markets; it’s something the [German] government has always accepted more than supported,” said a Berlin government source yesterday. “We view the situation in an open fashion. It’s not so clear at present and more a question of the balance of power in Frankfurt.”
While Berlin accepts ECB bond-buying – albeit passively – it actively opposes a full-blown EU-IMF bailout for Spain beyond the €100 billion already agreed for Spanish banks.
German finance minister Wolfgang Schäuble told the Welt am Sonntag newspaper yesterday that there was “no basis” to speculation that immediate assistance for Spain was in the works. Spain was well funded at present, he said, and it “wasn’t the end of the world” if a country had to pay over the odds at a few debt auctions.
“The Spanish government has taken all the necessary decisions . . . the finance markets haven’t rewarded these reforms yet, but that will come,” said Mr Schäuble, who today meets his US counterpart, Timothy Geithner.
“[Spain’s] reform programme will lead to a positive effect, also on the finance markets.”
The Merkel strategy – holding her line on bailouts and her tongue on ECB bond-buying – has annoyed her Free Democrat (FDP) junior coalition partner.
“Preserving price stability must be the principal role of the ECB and not the financing of state debt,” said Philipp Rösler, German economics minister and head of the FDP. “We can only establish new trust in the euro zone if budget discipline is strictly maintained and structural reforms are implemented.”
Many of Dr Merkel’s MPs share the view that short-term interventions to stabilise the euro zone will undermine the ECB’s credibility and northern Europe’s influence in the euro zone. “Mr Draghi has to act according to the ECB mandate – to ensure the euro remains stable – and anything beyond that is not acceptable,” said Michael Meister, deputy leader of the ruling Christian Democratic Union in the Bundestag.
