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ECB Makes Pitch to Germany on Bond-Buying

It appears the European Central Bank is ready to pick a fight with Germany over their resistance to saving the Eurozone economy through monetary means. Writing in the German newspaper Die Zeit, ECB president Mario Draghi espoused a viewpoint basically contradictory to the German reserve at using monetary tools to stop cascading bond yields in the troubled sovereigns. Here’s Draghi’s entire pitch to Germany, at the end of the Die Zeit piece:

Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools. When markets are fragmented or influenced by irrational fears, our monetary policy signals do not reach citizens evenly across the euro area. We have to fix such blockages to ensure a single monetary policy and therefore price stability for all euro area citizens. This may at times require exceptional measures. But this is our responsibility as the central bank of the euro area as a whole.

The ECB is not a political institution. But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.

Those who want to go back to the past misunderstand the significance of the euro. Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete EMU. This would finally give the euro the stable foundations it deserves. It would fully achieve the ultimate goals for which the Union and the euro were founded: stability, prosperity and peace. We know this is what the people in Europe, and in Germany, aspire to.

This doesn’t lay out the technical details of the ECB bond-buying program, but it lays the foundation for it, particularly against the protests of the German central bank, which opposes a big bond-buying scheme. Draghi says that extraordinary times call for extraordinary measures, and that the ECB cannot wait for the political forces to gradually coalesce before acting. Draghi tries to calm the fears of hyperinflation and price instability in the event of mass bond purchases. But as he says a bit earlier in the essay, Germany needs sound trading partners in the currency union, and a stronger economic and monetary union will provide that.

Now, what Draghi sees as a stronger economic and monetary union and what I see are two different things. He wants to force the troubled sovereigns into the euphemistically described “labor market reforms” before bailing them out with this bond program. But Draghi does understand that intervention is required when the normal monetary tools cannot find the right channel. And he’ll probably get his way on the labor market reforms, such is the desperation of countries like Italy and Spain.

The Financial Times notes that this has already had an effect in Italy, where bond prices where sharply lower. Italy’s Mario Monti and Germany’s Angela Merkel met yesterday, and while they differed on one scheme, to turn one of the European bailout funds into a bank, Merkel basically praised Monti for his “reform agenda.”

We should know more about the bond-buying scheme by next week, after an ECB policy meeting.

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David Dayen

David Dayen

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