EUROPEAN CENTRAL Bank president Mario Draghi raised the prospect that the bank might step up its response to the debt crisis but said EU leaders must first agree to toughen the enforcement of Europe’s budget rules.
Mr Draghi did not specify what action the bank might take, and he insisted that the ECB’s bond-buying campaign must remain limited.
In prepared remarks to MEPs, however, he indicated there was scope for the ECB to deepen its interventions if member states moved first to adopt a “fiscal compact” to reinforce Europe’s economic rulebook.
“We might be asked whether a new fiscal compact would be enough to stabilise markets and how a credible longer-term vision can be helpful in the short term. Our answer is that it is definitely the most important element to start restoring credibility,” he told the European Parliament in Brussels.
“Other elements might follow, but the sequencing matters. And it is first and foremost important to get a commonly shared fiscal compact right. Confidence works backwards: if there is an anchor in the long term, it is easier to maintain trust in the short term.
“After all, investors are themselves often taking decisions with a long time horizon, especially with regard to government bonds.” Mr Draghi’s remarks came one week before a crucial EU summit in Brussels, which has been billed as a final opportunity for European leaders to assert control over the debt crisis.
The ECB’s decision-making governing council will hold a scheduled meeting in its Frankfurt headquarters next Thursday in the hours before EU leaders gather for dinner that night in Brussels.
Only one month since he took office, the escalation of the emergency in the euro zone has put Mr Draghi in a very difficult position. Before his appointment, he had to surmount entrenched German resistance to the nomination of an Italian to the top seat in the ECB.
Although he persuaded chancellor Angela Merkel of his attachment to the ECB’s inflation-fighting mandate, the sense remains that he will be open to attack from German bailout- sceptics if the bank becomes some kind of a lender of last resort to distressed governments.
In addition, the ECB’s current interventions have created tension within the top tier of the bank itself. The bond-buying campaign prompted the departure of then Bundesbank president Axel Weber, while German ECB executive board member Jürgen Stark also resigned.
However, a drastic spike in Italian borrowing costs and pressure on Spain has led to anxiety in Europe that the authorities will not be able to overcome the debacle without increased ECB interventions. The pressure flows from concern that the European Financial Stability Facility bailout fund is too small to rescue Italy or Spain.
The ECB has been resisting, however, arguing that the European treaties forbid it from lending directly to nation states or the EFSF. The bank also argues that it cannot pledge to buy unlimited quantities of sovereign bonds on the open market.
Mr Draghi reiterated that stance in his prepared remarks yesterday, saying “such interventions can only be limited”. Under discussion at present, however, is whether the ECB moves to radically escalate the bond-buying campaign or lends money via national central banks to the International Monetary Fund so it step up its involvement in the euro zone.
Mr Draghi said the ECB had room for manoeuvre within the treaties and said the most important thing was to ensure blocked credit channels start working again.
The crisis raised fundamental questions and they called for an answer, he said. While he was confident a new budgetary surveillance framework would restore confidence over time, a credible signal was needed “to give ultimate assurance over the short term.”