Mounting his strongest case yet for ECB bond purchases, Draghi told lawmakers in a closed-door session at the European Parliament in Brussels yesterday that the bank has lost control of borrowing costs in the 17-nation monetary union. Bloomberg News obtained a recording of his comments, some of which were published by Italian news agency AGI yesterday.
“We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” Draghi said. “They have no importance whatsoever in the rest of the euro area.” ECB bond purchases are therefore “a way to comply with our primary mandate,” he said, adding: “Frankly, all this also has to do very much with the continuing existence of the euro.”
The Frankfurt-based ECB referred to the closed-door format of the hearing and did not provide any further comment. Draghi’s comments come two days before the ECB’s Governing Council is due to decide on his bond-buying proposal, expectations for which have already driven down yields in Italy and Spain. In the testimony, Draghi rebuts arguments that bond purchases stretch the central bank’s mandate.
“Do we give up our primary mandate for maintaining price stability?” he said. “It’s exactly the opposite situation.”
Draghi’s plan involves the ECB buying bonds on the secondary market of countries that ask Europe’s bailout fund to purchase their debt on the primary market, which would require them to sign up to conditions. Neither Spain nor Italy has made such a request yet.
The ECB sent proposals for the plan to national central banks today ahead of the Sept. 6 policy meeting. Germany’s Bundesbank opposes the ECB purchasing government bonds, saying it is too close to state financing for its comfort.
Draghi said the ECB’s interventions will not amount to monetary state financing as long as it purchases short-dated bonds.
“If we are to buy long-term bonds we are in a very delicate situation,” he told the lawmakers. “But if we go on the short-term part of the market where bonds have a length of time, a maturity of up to one year, two years or even three years, these bonds will easily expire, so there is very little monetary financing if anything at all that we are doing.”