The European Central Bank hasn’t run out of ammunition to battle an economic slump after cutting interest rates to a record low and announcing bond purchases, former Executive Board member Jose Manuel Gonzalez-Paramo said.
The central bank could offer more long-term loans like the three-year operations it introduced last year or ease collateral rules to feed more liquidity into the European economy, Gonzalez-Paramo said in an interview at IESE Business School in Madrid, where he joined the faculty after stepping down from the ECB in May. It could even buy bonds in a quantitative-easing program similar to those pursued by the Federal Reserve and the Bank of England, he said.
“If the screens were to tell you we were approaching deflation, the ECB could expand its balance sheet,” Gonzalez-Paramo said. “This is hypothetical, but there’s nothing that prevents the ECB from executing some QE-type” program.
ECB President Mario Draghi in July pledged to do “whatever it takes” to preserve the monetary union, which has been battered by a three-year debt crisis triggered by Greece’s hidden budget shortfall. Draghi said in September that the Frankfurt-based bank may buy the bonds of nations that submit to the conditions of a European Union rescue loan to lower yields.
Investors’ attention has focused on whether Spain will trigger the program.
Prime Minister Mariano Rajoy, who meets his French counterpart Francois Holland in Paris today, has said he is still weighing up whether his country needs a bailout since the ECB’s safety net has already offered investors some reassurance and lowered borrowing costs.
Since Draghi’s pledge, the yield on Spain’s 10-year bond has fallen from above 7.6 percent to 5.88 percent today.
For Spain “the key is to keep the market open,” Gonzalez-Paramo said. “Credibility of the budget is essential.”
Rajoy is struggling to meet his EU commitments for reducing the country’s budget deficit. The International Monetary Fund this week forecast that he’ll miss his targets for the next three years.
EU Economic and Monetary Affairs Commissioner Olli Rehn, who polices deficit obligations, raised questions about the 2013 budget, which assumes the economy will shrink by 0.5 percent next year compared with the IMF’s forecast of a 1.3 percent contraction.