Draghi Defends Bond Purchases With Warning of Deflation

ECB President Mario Draghi
European Central Bank President Mario Draghi, second right, and Germany's deputy finance minister Steffen Kampeter, second left, face press photographers before speaking to lawmakers in the lower-house of the German Parliament in Berlin. Photographer: Michele Tantussi/Bloomberg

European Central Bank President Mario Draghi defended his plan to buy government bonds in the German parliament today with a warning about deflation risks.

The ECB’s so-called Outright Monetary Transactions “will not lead to inflation,” Draghi told lawmakers in Berlin in a closed-door session, according to a text provided by the ECB. “In our assessment, the greater risk to price stability is currently falling prices in some euro-area countries,” he said. “In this sense, OMTs are not in contradiction to our mandate: in fact, they are essential for ensuring we can continue to achieve it.”

Draghi is seeking to win support in Europe’s largest economy for his plan to purchase government bonds to stem the debt crisis and safeguard the euro. Some German policy makers including Bundesbank President Jens Weidmann have said the proposal is tantamount to printing money to finance governments, which is prohibited by the ECB’s statutes.

“OMTs will not lead to disguised financing of governments,” Draghi said. “All this is fully consistent with the Treaty’s prohibition on monetary financing. Moreover, they will focus on shorter maturities and leave room for market discipline.”

Press Conference

Speaking at a press conference afterwards, Draghi said while it would be “too ambitious” to claim he had won over the German public, he had a “very productive, wide-ranging” exchange with German parliamentarians, which was aimed at building confidence and trust.

“His answers were very convincing and for that reason we can send a message to the German people that inflation fears are without foundation,” Norbert Barthle, the parliamentary budget spokesman for Chancellor Angela Merkel’s Christian Democratic Union party, told reporters. “His uppermost focus is the maintenance of price stability.”

Draghi explained that the ECB’s intervention is necessary “because confidence in the euro has been disturbed,” said Priska Hinz, the Green party’s budget spokeswoman.

The ECB president also convinced lawmakers that indebted euro states must commit to austerity measures and that his bond-buying program is not intended as an alternative to budget cuts, said Hans Michelbach, a lawmaker from Merkel’s CSU Bavarian sister party.

Draghi “emphasized that buying bonds is not the only instrument,” he said. “There is pressure to act on member states to ensure that they consolidate their finances. Draghi emphasized that this is the first priority.”

Merkel’s Blessing

The announcement of Draghi’s yet-to-be-deployed bond-buying program has calmed financial markets.

The program has Merkel’s blessing, yet 42 percent of respondents to a Stern survey published Sept. 6 said they had little or no trust in the ECB president, compared with just 18 percent who judged him favorably.

Draghi said the program won’t compromise the ECB’s independence because it requires governments to agree to conditions. The program doesn’t create “excessive risks” for euro-area taxpayers, he added, according to the ECB text.

“Such risks would only materialize if a country were to run unsound policies,” Draghi said. “The ECB intervenes only in countries where the economy and public finances are on a sustainable path.”

Bond purchases won’t fuel inflation because the ECB will absorb the liquidity created by those interventions, Draghi said.

The ECB expects the 17-nation euro economy to remain “weak in the near term,” before recovering very gradually in 2013, he said.

The International Monetary Fund earlier this month cut its euro-region growth forecast for next year to 0.2 percent from 0.7 percent and said the economy may shrink 0.4 percent this year as governments cut spending.

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