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.”
While many countries have made “substantial progress” recently, “we can’t exclude that at some point in time this progress can easily stop because of adjustment fatigue,” Draghi said. “So that’s why we are asking for conditionality combined with these interventions by the ECB. I think this could stand against the charges that we are doing monetary financing, because we are not doing it.”
Draghi started his testimony yesterday with an overview of the economic outlook.
He said financial-market sentiment “has somewhat calmed down over the past few weeks.” Still, the situation “remains fragile and it’s surrounded by heightened uncertainty,” he said. “Looking ahead we continue to expect only a gradual recovery with subdued momentum and risks on the downside.”
Draghi said risks to the inflation outlook “are still broadly balanced, but certainly further intensification of financial-market tensions has the potential to affect the balance of risks for both growth and inflation towards the downside.”
Lending to households and private sector companies is “still very, very sluggish,” he said.
Draghi said the debt crisis has distorted yields across a range of asset classes.
“Markets have perceptions of a certain country in a crisis,” he said. “Therefore they ask for higher interest rates in order to buy the bonds issued by the country. And when I say bonds I don’t only mean government bonds. Bank bonds, corporate bonds. Markets are asking for higher and higher interest rates, which in return reinforce the situation of the perception of the crisis. That’s where the main justification to step in is for the ECB and start buying bonds.”
The fact that the ECB’s monetary policy is only being transmitted in one or two euro nations compels the ECB to intervene, Draghi said.
“We have to rebuild the euro area,” he said. “We have to overcome this fragmentation exactly for pursuing price stability through changes in interest rates.”
For a “genuine” monetary union to be achieved, policy makers must make progress in four areas, Draghi said -- financial, fiscal, political and economic.
It is “high time to take a comprehensive approach,” he said. “I’m convinced that we need a robust and shared vision for the duration of the European monetary union over the next decade. A solid long-term anchor is essential to put the euro area back on the path of stability. This long-term vision is an indispensible complement to the short-term management of the crisis.”
Draghi began the session by thanking committee members for their warm wishes.
“We collectively are going to need all of them in the coming weeks and coming months,” he said.