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Draghi defends ECB steps, says now up to governments
September 26, 2012 / 2:21 AM / 5 years ago

Draghi defends ECB steps, says now up to governments

BERLIN (Reuters) - European Central Bank President Mario Draghi offered a vigorous defence of the bank’s bond-buying plans to a sceptical German audience on Tuesday and said it was now up to governments to follow with decisive policy steps of their own.

Speaking at a conference of the Federation of German Industries (BDI) in Berlin, Draghi described the ECB’s plan, unveiled earlier this month, to buy the sovereign bonds of stricken euro members as a “bridge” rather than a solution to the three-year-old crisis haunting the currency bloc.

And he cautioned euro zone leaders against complacency, urging them to seize on improved market sentiment generated by the ECB to press ahead with reforms and closer integration of their budget policies.

“The current improvement in sentiment does not mean everything is solved,” Draghi said in his first major policy speech in Germany since his plan for “Outright Monetary Transactions” unleashed a storm of criticism there.

“The ECB’s action can only be the bridge to the future. The project must be completed through decisive actions by governments both individually and collectively.”

The euro rose more than 10 cents to a four-month high against the dollar between late July, when Draghi first signalled his plan, and mid-September. The borrowing costs of weakened euro members such as Spain and Italy also fell.

But that confidence has faded over the past week amid doubts about Spain’s readiness to seek the aid programme that is a prerequisite for the ECB to buy its bonds, and reports that Greece’s budget hole is bigger than anticipated.

Also weighing on sentiment on Tuesday was a report in German newspaper Bild that lawyers at Germany’s central bank, which opposes Draghi’s bond plan, were checking its legality. The Bundesbank refused to confirm the report.


European Central Bank President Mario Draghi (R) gets out of his limousine on his way to meet German Chancellor Angela Merkel at the Chancellery in Berlin, September 25, 2012. REUTERS/Fabrizio Bensch

Draghi spoke at the industry conference after meeting German Chancellor Angela Merkel who has supported the Italian’s bond-buying plan despite the Bundesbank’s stance and opposition from Germany’s conservative establishment.

Bundesbank President Jens Weidmann, a former adviser to Merkel, has said Draghi’s plan amounts to financing of weak euro zone governments by the central bank and therefore violates its mandate for ensuring price stability.

Looking out at his audience of industrial leaders, the ECB chief said he had “enormous respect” for the Bundesbank and made clear he and his colleagues on the ECB’s policy-making Governing Council shared many of its concerns. Where they differed, he said, was in how to respond.

“In the current circumstances, the greatest risk to stability is not action, it’s inaction, this is why the ECB has acted,” Draghi said.

He rejected Weidmann’s contention that the bond-buying programme amounts to financing of governments, saying the euro zone had experienced a “very severe fragmentation” in recent months, characterised by diverging borrowing costs that reflected “unfounded” fears of a euro zone breakup.

“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. We decided in favour of the latter.”

Merkel’s office issued a statement after she met Draghi which said they had agreed that considerable reform efforts by euro zone governments were still needed to boost competitiveness and restore credibility.

Speaking at the same conference earlier in the day, Merkel said Europe needed to take a deep breath and press on with steps to boost productivity and rein in budgets. She conceded that Germany, which some economists fear could fall into a technical recession in the second half of this year, was “not an island”.

But she put the onus on struggling euro partners to fix their economies, saying Germany was doing its part to help the bloc through higher consumption at home.

Reporting by Noah Barkin and Sarah Marsh; Writing by Stephen Brown; editing by David Stamp

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