Business World

Friday 20 April 2018

ECB president Mario Draghi defends bond buying plan in Bundestag

European Central Bank (ECB) Executive Board member Joerg Asmussen (L-R) ECB President Mario Draghi and German lower house of parliament Bundestag President Norbert Lammert pose for the media before speaking to German lawmakers in the Bundestag. Photo: Reuters
European Central Bank (ECB) Executive Board member Joerg Asmussen (L-R) ECB President Mario Draghi and German lower house of parliament Bundestag President Norbert Lammert pose for the media before speaking to German lawmakers in the Bundestag. Photo: Reuters

THE European Central Bank President Mario Draghi made a robust defence of his bond-buying plan to ease the eurozone's debt crisis, telling German lawmakers their fears of illegal funding of governments or stoking inflation are misplaced.

A smiling Draghi entered the lion's den of the Bundestag lower house for a two-hour grilling behind closed doors on Wednesday on the ECB's Outright Monetary Transactions (OMT) programme, which the German central bank has denounced as tantamount to printing money to finance governments.

Rebutting the main objections point by point, Draghi said, according to an opening statement released by the ECB: "First, OMTs will not lead to disguised financing of governments.

"Second, OMTs will not compromise the independence of the ECB... Third, OMTs will not create excessive risks for euro area taxpayers... Fourth, OMTs will not lead to inflation."

The rare appearance in a national legislature underscored how important it is for Draghi to keep politicians in Europe's biggest economy on-side amid a broader German backlash.

The Italian ECB chief addressed a joint session of the parliamentary budget, European and foreign affairs committees on a day when business surveys suggested Germany is being sucked into the euro zone's economic malaise.

Outside the parliament building in Berlin a handful of protesters demonstrated in red T-shirts bearing the slogan: "Hands off the printing presses, Mr Draghi!"

The demonstrators were from a Eurosceptic group called "Young Entrepreneurs". One banner read: "ECB = Bad Bank."

Unveiled in early September, the ECB bond-buying programme aims to support troubled euro zone states such as Spain by reducing their borrowing costs, provided they request aid and submit to strict policy conditions and monitoring.

Even though it has not yet been implemented, the policy has already helped ease the euro zone's crippling three-year crisis, but German critics say it violates an ECB taboo on financing governments, taking the bank into dangerous new territory.

Draghi said the central bank had considered the possible risks carefully and designed the programme to minimise them - "But I am aware that some observers in this country remain concerned about the potential impact of this policy," he added.

RISK TRANSFER

One lawmaker attending the briefing told Reuters in a text message from inside the room: "So far I've heard nothing new from Mr. Draghi except for a strict monetary policy defence of his measures."

Jens Weidmann, head of the Bundesbank, opposed the plan from the outset, as did conservative German media, and the Bundesbank renewed its public assault on the policy as recently as Monday, warning of a transfer of risks to European taxpayers.

"What the ECB is doing at the moment has nothing to do with its mandate," Klaus-Peter Willsch, a lawmaker from Chancellor Angela Merkel's Christian Democrats (CDU), said before the session.

"I want to hear from Mr. Draghi how he can reconcile unlimited bond purchases with the bank's price stability objective," said Willsch, a leading critic of Europe's bailouts.

Another Merkel ally denounced Draghi as a "Falschmuenzer", or counterfeiter, after he announced the OMT plan.

Draghi was not the first ECB president to appear in Germany's lower house of parliament. His French predecessor Jean-Claude Trichet, along with former IMF chief Dominique Strauss-Kahn, briefed lawmakers in April 2010 on the details of the first financial bailout for Greece.

But Wednesday's session, which began with a 10-minute introductory statement and was to be followed by a lengthy question and answer period and short public statements from Draghi and Bundestag President Norbert Lammert, was a rarity.

The ECB was designed to be fully independent, and its president is not answerable to politicians.

The briefing only took place because Draghi volunteered to explain his policies in Berlin after they triggered uproar at the end of the summer.

CONDITIONS

Merkel, many of her conservative allies and opposition parties like the Social Democrats (SPD) and Greens have voiced support for the ECB chief's programme, but there are still many unanswered questions he will be pressed on.

"Mr. Draghi has made clear that bond purchases can only take place under certain conditions," said Priska Hinz, a budget expert for the Greens. "We will want to know what kind of aid programme and conditionality he sees as prerequisites."

This is crucial for Spain, which has resisted putting in a formal request for state aid, in part because of concerns among Spanish leaders and voters that they would be forced to take additional painful measures on top of the budget cuts, tax rises and economic reforms already enacted.

Many of Merkel's allies are resistant to a Spanish rescue precisely because they fear it would trigger "unlimited" bond purchases by Draghi's ECB.

"There is a lot of opposition to a programme for Spain. They are against it because they fear it would open the floodgates at the ECB. The concerns run very deep, also in the SPD," said Guntram Wolff, deputy director of the Brussels-based Bruegel think-tank and a former Bundesbank economist.

Norbert Barthle, a budget expert for Merkel's CDU, said his colleagues would also press Draghi about plans to give the ECB new responsibilities for supervising banks across Europe. Many lawmakers want assurances that this will not interfere with the bank's core monetary policy task.

But amid the concerns, there was general agreement that Draghi had done the right thing in offering to explain his policies at a time when many citizens in Europe feel momentous decisions are being taken without their input.

"One of the big problems of Europe is that European institutions only talk to voters through national governments," said Wolff. "So it's important to have a direct link to the people, and this is a step in that direction."

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