ECB president hits at more support for euro
Friday, December 2, 2011
BRUSSELS (AP) — More than ever before, the European Central Bank seems willing to consider bolder action to address the continent’s financial crisis.
A month ago, at his first news conference as ECB president, Mario Draghi said it was “pointless” for European governments to expect the bank to rescue them through massive bond purchases. That had been the same stance as his predecessor, Jean-Claude Trichet. But on Thursday, Draghi hinted that such expectations might not be futile after all.
Draghi opened the door to further ECB intervention ever so slightly in a speech to the European Parliament. He said the bank is prepared to play a bigger, yet limited role in the resolution of Europe’s debt crisis — but only after the 17 countries that use the euro tether their economies more tightly.
Confirmation that such a plan is afoot came later Thursday in a speech by French President Nicolas Sarkozy. He said he and German Chancellor Angela Merkel will meet Monday in Paris and unveil their proposals for European treaty changes aimed at preventing a catastrophic breakup of Europe’s 17-nation currency union.
Speculation is mounting that EU leaders will align their spending policies more closely to bring government debt levels under control in the future. This must happen, Draghi said Thursday, before the ECB or other institutions could take more aggressive steps to help prevent the continent’s current debt overload from ripping apart the euro and the global financial system.
“Other elements might follow, but the sequencing matters,” Draghi said. “And it is first and foremost important to get a commonly shared fiscal compact right.”
Draghi gave the speech after delivering the bank’s 2010 annual report to the European Parliament, a body of elected representatives to which the ECB is accountable.
Analysts’ decoding Draghi’s message — which was delivered in typically vague central bank speak — sensed an opening they hadn’t heard before.
“Draghi seems to suggest that if a fiscal compact does get approval and looks credible, then the ECB can shift gears and become more interventionist,” said Neil MacKinnon, global macro strategist at VTB Capital.
Laura Veldkamp, an economics professor at New York University, said: “I would say this is a big change. Traditionally, the ECB has seen its only objective as maintaining a stable, low rate of inflation. The very idea that he’s (considering) doing something to stabilize bond markets ... is a big change.”
Still, Draghi’s comments were laced with enough caveats to temper the euphoria that swept across financial markets Wednesday, when the ECB, the Federal Reserve and four other central banks took decisive action to make it cheaper for commercial banks to borrow dollars.
The ECB cannot lend directly to governments, including by buying their national bonds. It can, however, buy national bonds on the secondary market, lowering borrowing costs for governments. The ECB has committed just over $268 billion to such purchases, but it has resisted going further because it believes that would take the pressure off politicians to cut spending.
Draghi said such interventions “can only be limited” and said it is up to governments to first put their finances in order to convince bond markets that they are creditworthy borrowers.