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ECB head: bond buying won't cause inflation

The Local · 24 Oct 2012, 17:27

Published: 24 Oct 2012 17:27 GMT+02:00

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"The ECB's new measures help to guarantee price stability in the eurozone," ECB President Mario Draghi told a closed session of the Bundestag lower house of parliament, according to a copy of his speech, in a direct attempt to soothe the fears of many German politicians.

The OMT programme, under which the ECB will buy unlimited amounts of the bonds of struggling countries to bring down their borrowing costs, "will not lead to inflation," Draghi stressed.

The ECB head, who rarely speaks to lawmakers in EU member states, defended his strategy of bond-buying from the eurozone's hardest-hit nations during a two-hour grilling from German MPs.

He said the plan was needed so that weaker nations could benefit from the ECB's low interest rates and that the bank would buy unlimited amounts of the bonds of countries with high borrowing costs - but only if they first applied for a bailout from the EU and accepted tough reforms in return.

The plan is widely credited as providing a turning point in the three-year eurozone debt crisis, but was attacked by many politicians in Germany, who fear it will lead to inflation and price instability.

"The ECB's bond-buying programme can be viewed critically, the concerns must be taken seriously," said Steffen Kampeter, a senior parliamentarian from Chancellor Angela Merkel's conservative Christian Democratic Union.

Others, notably the country's top economic institutes, have also raised the fear that the programme would stoke inflation, to which Germany is particularly sensitive given its experience with hyperinflation leading up to World War II.

The Berliner Zeitung newspaper commented: "An Italian is coming to Germany to assuage the fears of Bundestag members about inflation. Mario Draghi ... can only lose this battle."

"The Germans won't let their inflation trauma be treated by anyone, let alone a southern European," added the paper.

But Finance Minister Wolfgang Schäuble rode to Draghi's defence, telling the Die Zeit weekly that "to accuse the ECB of being unaware of stability is to ignore reality. It is acting within its mandate."

However, in an unprecedented move, the head of Germany's powerful central bank, Jens Weidmann, expressed his displeasure in a written statement, distancing himself from the programme.

Weidmann fears that intervening on the bond markets to lower borrowing costs of the likes of Spain and Italy is tantamount to monetary financing - printing money to aid governments - which is expressly forbidden by the ECB treaties.

He also said that such actions would reduce the incentives for debt-wracked countries to make the reforms and cuts necessary to regain the confidence of the markets.

Meanwhile, senior German economist and ECB executive board member Jörg Asmussen denied reports in Wednesday's Süddeutsche Zeitung newspaper that Greece would be given an extra two years to fulfil conditions laid down by the troika - the EU, ECB and the International Monetary Fund - for new rescue loans.

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The report said Athens would be allowed to cut its deficit to three percent of its gross domestic product in 2016 instead of the previous deadline of 2014. The deadlines given to Greece to implement reforms to its job market and in the energy sector, as well as privatisations would also be relaxed, the newspaper said.

"So far the troika has reached no final agreement with the Greek government," Asmussen told German television. "There's progress in Athens. But we're not there yet."

Draghi also confirmed this, telling reporters the international review of Greek reforms needed to unlock more aid had not been completed.

AFP/DAPD/DPA/The Local/jlb

The Local (news@thelocal.de)

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Your comments about this article

18:22 October 24, 2012 by smart2012
Mario draghi, Mario Monti and Hollande are saving Europe.. Verkel policy has brought Germany back to 2009. Well done verkel.
18:30 October 24, 2012 by IchBinKönig
Buying bonds won't cause inflation, don't be silly! First, the tax payer must buy the bonds at full value, then we begin with the inflation! Then we will allow the Taxpayer to repay us for the bonds they bought for us with €uro in a wheelbarrow, adjusted for inflation.

Just remember how annoying it was to have to show your passport when you traveled between countries, and you will see this was all worth it.
22:23 October 24, 2012 by smart2012
Konig, your proposal is to break euro??? Ok, then every german will need to buy 1000 Audi each, 1000 elevators each, 1000 Mercedes each to enable German companies to survive... LOL
23:48 October 24, 2012 by elboertjie
Bond buying IS inflation.

The ECB creates new money out of thin air, use that money to purchase government bonds, the government spend that money in the economy and now the supply of money in the economy has increased, thereby diluting the strength of the existing money pool, hence needing more money to purchase the same goods, hence having prices that seems to be 'rising'.

It is not prices that is rising, is is the strength of a currency against physical goods that is falling.
07:58 October 25, 2012 by ChrisRea
High borrowing cost means that the market has doubts about the capability of the respective country to return the money (high risks). For ECB, implementing the reforms is a good proof that the money can be returned. So the market's opinion is replaced with EU's supervision. None are perfect (Greece benefited from low borrowing costs because the market did not see high risks). We shall see if the new model works or not. It is a bit like IMF, which, as far as I know, did not lead to inflation. Time will tell.

I had a high opinion about Berliner Zeitung, but them bringing Draghi's nationality into discussion sounds a bit like Bild.
09:25 October 25, 2012 by SynJyn Tweer
We all know at the end of the day the small man in the street will pay the bill via tax or inflation or both. People who do not believe this look at the the increase in poor to the "ultra rich [they never pay like the small man]"
09:57 October 25, 2012 by michael4096
I've always worried about the commercial banks setting national bond rates when the main beneficiary of high rates is ... the commercial banks. Perhaps, the ECB can work as a dampener.

I agree with ChrisRea, Draghi's nationality isn't part of the debate.
12:00 October 25, 2012 by sonriete
So he says the bond buying plan is "neither inflationary nor covert aid to governments"

I suppose I could agree with his statement that it is not covert aid, if only because it is overt aid !

Not that I think aid in itself is bad or wrong, but why must he lie?

And what exactly does this man think causes inflation? The birds and the bees?
20:16 October 25, 2012 by Sashzilla
Ok I'm not an economist but isn't more money into the money pool creating the inflation? Ok ya the interest rates are high to balance it? Ok fine how about who is going to pay that high interest rates? The middle and the lower class? As the rich will some how get it back through fraud. :).
23:42 October 25, 2012 by truth is treason
I agree with him it will not cause Inflation, it will cause HYPER INFLATION. Do not buy Bonds, Buy gold and silver.

If the entire Bankers bailout was used to pay some money to every mortgage in Germany, each Mortgage would be reduced by 60%. The trouble is the Bankers the middle men did not pass it on to the people.
00:53 October 26, 2012 by IchBinKönig

'1000 Audi each, 1000 elevators each, 1000 Mercedes each to enable German companies to survive... LOL '

Oh good, I guess then that all those newly wealthy Southern EUropeans now will fill the German coffers. Perfect, let me know how that goes.
16:49 October 27, 2012 by sonriete
the mandate of the ECB is to keep inflation under control, whithin a a little over or under 2%. The eurozone inflation rate has shot up to 2.7% and is still rising. It is up to Mr. Draghi to explain how it is that all of the ECB bond buying over the past year has not contributed to this, to show how, not just say so.
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