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European Central Bank (ECB) President Mario Draghi and Vice President Vitor Constancio (L) leave after addressing an ECB news conference in Frankfurt last week
The ECB said it would purchase sovereign debt from this March until the end of September 2016, despite opposition from Germany’s Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms.
Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programwill release 60 billion euros ($68 billion) a month into the economy, ECB President Mario Draghi said.
By September next year, more than one trillion euros will have been created under quantitative easing, the ECB’s last remaining major policy option for reviving economic growth and warding off deflation. The flood of money impressed markets: the euro fell more than two US cents to $1.14108 on the announcement, and European shares hit seven-year highs.
“All eyes were on Mario Draghi and he has delivered a bigger bazooka than investors were expecting,” said Mauro Vittorangeli, a fixed income specialist at Allianz Global Investors, adding that the news marked “an historic crossroads for European markets”.
The ECB and the central banks of euro zone countries will buy up bonds in proportion to its “capital key”, meaning more debt will be scooped up from the biggest economies such as Germany than from small member states such as Ireland.
The prospect of dramatic ECB action had already prompted the Swiss central bank to abandon its cap on the franc against the euro. Denmark cut its main policy interest rate on Thursday for the second time this week after the ECB announcement, aiming to defend the Danish crown’s peg to the euro.
Draghi has had to balance the need for action to lift the euro zone economy out of its torpor against German concerns about risk-sharing and that it might be left to foot the bill.
Economists noted that Draghi had said only 20% of purchases would be the responsibility of the ECB. This means the bulk of any potential losses, should a euro zone government default on its debt, would fall on national central banks.
Critics say this casts doubt over the unity of the euro zone and its principle of solidarity, and countries with already high debts could find themselves in yet deeper water.
“It is counterproductive to shift the risks of monetary policy to the national central banks,” said former ECB policymaker AthanasiosOrphanides. “It does not promote a single monetary policy. This path towards Balkanisation of monetary policy would signal that the ECB is preparing for a break-up of the euro.”
Tensions broke out as the ECB’s meeting got underway with French Finance Minister Michel Sapin firing a broadside at Berlin. “The Germans have taught us to respect the independence of the European Central Bank,” he told France Info radio. “They must remember that themselves.”
A German lawyer who has been prominent in attempts to halt euro zone bailouts said he was already preparing a legal complaint against the bond-buying program.
Draghi said the ECB’s Governing Council had been unanimous in agreeing that the step to print money was legally sound. There was a large majority on the need to trigger it now, “so large that we didn’t need to take a vote”.
“There was a consensus on risk-sharing set at 20% and 80% on a no-risk-sharing basis,” he added.
One euro zone central banking source said five policymakers opposed the expanded asset-purchase plan: the central bank chiefs of Germany, the Netherlands, Austria and Estonia, along with Executive Board member Sabine Lautenschlaeger, a German.
Guntram Wolff, head of the Bruegel think tank, said the plan’s size was impressive. “But the ECB has given the signal ... that its monetary policy is not a single one. That’s a bad signal to markets and a bad signal to everybody in the euro zone.”
Draghi says euro zone governments need to redouble reform effortsReuters: National governments in the euro zone need to redouble their reform efforts to create a ‘genuine’ economic union, ECB Mario Draghi wrote in a German magazine published on Saturday after the European Central Bank’s bond-buying program was unveiled. In an advance text of a contribution for the WirtschaftsWoche magazine, Draghi wrote the euro zone’s political union needs to be deepened. He said reforms were needed to raise competition, cut bureaucracy and improve labour market flexibility. “By requiring governments in an economic union to undertake structural reforms, they give credibility (to the idea) that they can actually overcome their debts through growth,” Draghi wrote. The ECB took launched a government bond-buying program on Thursday that will pump hundreds of billions in new money into a sagging euro zone economy. The ECB will buy sovereign debt, despite opposition from the Bundesbank and concerns in Berlin it could let spendthrift countries to slacken economic reforms. Combined with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programme will release 60 billion euros ($ 68 billion) a month into the economy. Draghi, who had worked hard to prepare the ground for QE in Germany, did not expressly defend the ECB’s decision in his WirtschaftsWoche contribution, according to the advance text. But he urged euro zone countries to do their part. “Every member must be in the position to take advantage of comparative advantages in the common market in order to attract capital and create jobs,” he wrote. “For that there is a need for structural reforms that promote competition, dismantle bureaucracy and increase the adjustment ability of labour markets.” Draghi said that in an economic union there is, nevertheless, a clear common interest. “That’s why there are weighty arguments that speak in favour of jointly exercising sovereignty in this area – in the framework of a genuine economic union.” |
