Draghi Takes On Bundesbank Orthodoxy in Crisis-Plan Plea
Countering arguments made by the German economics establishment since before the introduction of the euro, European Central Bank President Mario Draghi said it’s in Germany’s interest to consent to extraordinary steps to preserve the currency shared by 17 nations.
Draghi used the pages of German weekly Die Zeit to plead for a more expansive role for the central bank and to say that the crisis-struck currency can be stabilized without sacrificing each country’s independence to a unified European political system.
In tactical terms, Draghi sought to neutralize protests made by Germany’s top central banker, Jens Weidmann, against ECB proposals to buy Spanish or Italian bonds on the market in order to bring down their borrowing costs and prevent the debt crisis from spreading. Draghi made his appeal in the run-up to the ECB’s Sept. 6 discussion of bond-market interventions for Spain or Italy and a Sept. 12 ruling by Germany’s supreme court on the viability of the planned euro rescue fund.
“A new architecture for the euro area is desirable to create sustained prosperity for all euro-area countries, and especially for Germany,” Draghi wrote. “Yet this new architecture does not require a political union first. Economic integration and political integration can develop in parallel.”
Draghi didn’t mention Weidmann, who last week broke more than a month of silence by telling Spiegel magazine that the bond-buying proposal is a “touchy” matter and the thought of interest-rate targets gives him “stomach pains.” Weidmann, head of the Bundesbank, summed up the idea as “addictive like a drug.”
Two days after the Bundesbanker’s comments were released, Draghi canceled a trip to the annual Jackson Hole economic symposium in the U.S. this week to shepherd the ECB’s negotiations over the bond purchases.
“Draghi is desperate to ease policy further and buy bonds,” Kit Juckes, London-based head of foreign-exchange research at Societe Generale SA, said in a note to clients today. He “would like to convince the Bundesbank of the need to do so, and we will find out what is going to happen next week.”
Since Draghi first floated the idea on July 26, Spanish and Italian bonds have rallied. Spain’s extra 10-year borrowing cost over German levels declined to as low as 465 basis points Aug. 21 from 611 basis points. Italy’s extra borrowing cost has dropped to 410 basis points the same day from 518 basis points.
Draghi, an Italian applauded by Germany’s best-selling Bild tabloid for his disciplined economic philosophy when he took over the ECB last year, said Germany as Europe’s linchpin economy would be a leading beneficiary of any unconventional measures to stabilize the currency union.
He struck out against a German shibboleth -- echoed by Weidmann in the Spiegel interview -- that the central bank only exists to fight inflation.
In fact, euro treaties label price stability the ECB’s “primary” task, and otherwise require it to support the European Union’s general economic policies. The Bundesbank and its allies also point to provisions prohibiting the ECB from directly financing governments.
“Our mandate sometimes requires us to go beyond standard monetary-policy tools,” Draghi wrote. “This is our responsibility as the central bank of the euro area as a whole.”
The Weidmann-Draghi debate in the German media served as a prelude to the crisis-management showdowns that loom as Europe’s leaders return from vacation. In addition to the ECB’s bond- buying clash and the German court ruling, the agenda includes a review of Greece’s deficit-reduction progress, details of Spain’s bank-aid program, emergency loans for Cyprus and the unveiling of European bank-supervision plans.
Draghi took the unusual step of publicly cornering Weidmann on Aug. 2, telling a press conference that the Bundesbank chief was alone in expressing “reservations” about a renewed bond- purchase program that would tie countries such as Spain or Italy to tough conditions.
While the battle is over the ECB’s next move in the more than 2 1/2-year-old debt crisis, it also played out on a higher level, with Draghi challenging a strand of German thinking that holds that only a fully fledged “political union” will right the euro’s wrongs.
That all-or-nothing approach has long appealed to the Bundesbank. In October 1990, more than a year before the summit in Maastricht, Netherlands, that set the stage for the euro, the German central bank said only a “comprehensive political union” could make a common currency work.
After being named Bundesbank president last year, Weidmann said the euro’s salvation probably required a “giant leap” to a federal political system instead of a “middle road” of tinkering with a flawed setup.
Draghi parried those arguments by saying that Europeans aren’t faced with the choice of the extremes of reverting to national currencies or building a United States of Europe. Europe already has many of the trappings of political union, with a directly elected European Parliament and a range of decisions made by representatives of national governments, he wrote.
“Those who want to go back to the past misunderstand the significance of the euro,” Draghi wrote. “Those who claim only a full federation can be sustainable set the bar too high.”
Euro countries can undertake a “gradual and structured effort” to strengthen central oversight of national budgets and the banking system, and build a more robust common market, Draghi said.
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