ECB's Draghi faces German lawmakers

AP News
Posted: Oct 24, 2012 9:19 AM
ECB's Draghi faces German lawmakers

BERLIN (AP) — The European Central Bank's president told German lawmakers Wednesday that his controversial bond-buying plan won't stoke inflation and will not allow struggling countries to backslide on economic reforms.

In an effort to win over skeptical public opinion in Europe's biggest economy, Mario Draghi met members of the German Parliament's budget, finance and European affairs committees in a closed-doors meeting at the Reichstag building in Berlin.

The ECB last month announced its plan to buy unlimited amounts of short-term bonds of troubled euro economies — a program aimed at keeping a lid on the borrowing costs of indebted countries such as Spain and Italy.

Even though the government of Chancellor Angela Merkel supports the plan, the president of Germany's central bank, Jens Weidmann, argues that they come too close to using the ECB's power to print money to support governments' finances directly, which the bank isn't allowed to do under its legal statutes. And there are worries in Germany that unlimited bond purchases could undermine the ECB's official mission of fighting inflation.

Draghi tackled those concerns in opening remarks to the gathering released by the ECB, insisting that investors' "unfounded fears about the future of the euro area had to be removed."

"The only way to do so was to establish a fully credible backstop against disaster scenarios," he said, adding that "we have to understand how markets work."

Draghi highlighted the fact that the bond-buying will only be triggered once countries apply for help from European rescue funds — which impose conditions for granting aid.

And, he insisted, the purchases "will not lead to inflation."

"In our assessment, the greater risk to price stability is currently falling prices in some euro area countries," he said. "In this sense, (bond purchases) are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it."

The ECB head argued that the program "will not lead to disguised financing of governments" because bonds will be bought from investors on so-called secondary markets, not from governments.

Draghi repeated his oft-stated mantra that it is up to governments to fix their finances, reform their economies and work together to improve the eurozone's structure — something that is line with official thinking in Germany.

He maintained that bond purchases won't create "excessive risks" for European taxpayers because "such risks would only materialize if a country were to run unsound policies." But that, he added, is "explicitly prohibited" by eurozone rescue fund programs.

No country has yet sought to tap the new ECB program, though Spain faces pressure to do so given the parlous state of its economy and its elevated borrowing costs.

Germany's Parliament would have to approve any application for money from the eurozone's own rescue funds — an application that is necessary before the ECB can act to assist a eurozone nation.