October 23, 2012 / 9:01 AM / 5 years ago

Stark: Draghi needs to reason with German MPs

FRANKFURT (Reuters) - European Central Bank President Mario Draghi must come armed with watertight arguments and solid analysis justifying the ECB’s new bond-purchase program when he meets German lawmakers on Wednesday, the ECB’s former chief economist told Reuters.

Draghi has agreed to go to Berlin to soothe German angst about the ECB’s plan to buy short-term bonds of heavily indebted euro zone countries to lower their borrowing costs, which some fear will fuel inflation and overstretch the ECB’s mandate.

Juergen Stark, who resigned last year over the ECB’s first bond purchase program, said the bank’s follow-up plan could pile enormous risks onto the ECB’s balance sheet for which - if things went wrong - European taxpayers would have to pay.

“He can’t just tell the German parliamentarians ‘it is all within the mandate of the ECB. Basta’,” he said in an interview, referring to the ECB’s core task of delivering stable prices.

“The planned bond purchases go beyond the ECB mandate, and Draghi has to come up with more convincing reasons than so far.”

Germany’s Bundesbank, whose president was alone in voting against the new bond buy plan, struck a similar tone in its monthly report on Monday, warning about growing risks for taxpayers as a result of the ECB’s decision.

Asked whether the Bundesbank should stay out of the next round of ECB bond purchases given its concerns, Stark said he did not want to give advice to the Bundesbank.

“But one must ask the question whether the Bundesbank must implement the decisions of the ECB Council, if the German constitutional court at the same time signals doubts about these,” he said.

Germany’s highest court agreed in September, when giving the green light for Germany to ratify Europe’s permanent bailout fund, to take a closer look at the ECB’s bond-buying plan at a later date.

While many German lawmakers and the Bundesbank have major reservations about the ECB’s plans, Chancellor Angela Merkel has made clear she supports the program. Stark said the government backed the ECB to avoid having to ask parliament for more money.

“For short-term, indeed opportunistic, grounds the easier path is being taken by circumventing parliament,” he added.


Stark said the ECB had dug itself into a difficult situation with its new bond-buy plan - dubbed “Outright Monetary Transactions” (OMT) - as it would find it hard to stop buying if a country failed to meet the conditions for ECB intervention.

“The ECB is making itself a prisoner of politics,” he said. “Here, the ECB enters very dangerous territory, because monetary policy cannot be made dependent on the behavior of others.”

If there was a monetary policy problem, the ECB had to intervene right away and could not afford to wait for others to give the all-clear, Stark said.

“It’s about member states being able to refinance at more favorable rates than in the market and that is not monetary policy any more,” he added.

The current divergences in interest rates that companies and households have to pay across the euro zone should be addressed by national governments rather by the ECB, which had already done a lot to fight the crisis, Stark said.

Spain, which is seen to be among of the countries to benefit from the ECB’s new policy, should ask for a fully-fledged bailout program rather than just a refinancing program for its ailing banking sector.

“Spain has not only a banking problem, but a profound economic problem, for example in the labor market,” he said.

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