European Central Bank President Mario Draghi on Wednesday sought to allay the concerns of some German lawmakers about the ECB’s plan to buy the bonds of financially-stressed euro-zone countries such as Spain and Italy in the secondary market in an effort to lower their borrowing costs.
Draghi defended the bank’s so-called Outright Monetary Transactions (OMT) in the Bundestag, the German lower house, as the government of Prime Minister Mariano Rajoy continued to weigh up the merits or otherwise of asking for assistance from the European Stability Mechanism (ESM), the permanent bailout fund, in order to trigger intervention by the ECB. Aid from the ESM will come with conditions attached.
Conservative factions within German Chancellor Angela Merkel’s Christian Democratic Union (CDU) party and its junior partner in the government, the liberal Free Democratic Party (FDP), have been critical of the ECB program, as has the influential president of the Bundesbank, Jens Weidmann. Merkel and her finance minister, Wolfgang Schäuble, support ECB intervention.
Draghi countered arguments that the OMT scheme constituted a “disguised” form of financing governments, which is prohibited under European Union Treaty. “If interventions take place, they will involve buying government debt from investors, not from governments,” Draghi said. “All this is fully consistent with the Treaty’s prohibition on monetary financing.”
He also rejected the idea that program undermines the ECB’s independence. “The ECB will continue to take all decisions related to OMTs in full independence,” he said. “It will decide whether to intervene based on its own assessment.”
The ECB will continue to take all decisions related to OMTs in full independence”
There are also concerns that the program could involve risks for taxpayers in Germany and other euro-zone countries. “Such risks would only materialize if a country were to run unsound policies. This is explicitly prevented by the ESM program,” Draghi countered, adding that intervention would cease during reviews of ESM aid recipients’ compliance with the terms of their assistance, and would only be renewed if reviews are concluded positively.
The ECB head also denied the program would fuel inflation as any injection of money it entails would be sanitized. “For every euro we inject, we will withdraw a euro,” Draghi said.
Draghi said the OMT program was essential to restore the effectiveness of the ECB’s monetary policy transmission in a fragmented market where interest rates in some countries such as Spain had actually risen after cuts in official interest rates as a result in part of irrational fears by investors.