– The ESM Violates The Law And EU Treaties (Welt, Sep 4, 2012)
– Central Bank to Snap Up Debt, Saying, ‘Euro Is Irreversible’ (New York Times, Sep 6, 2012):
FRANKFURT — The European Central Bank on Thursday announced a sweeping program for buying the bonds of troubled euro zone countries, giving the bank potentially unprecedented power.While the bank’s president, Mario Draghi, insisted that the central bank was not violating a prohibition on its financing governments, it was effectively becoming lender of last resort to countries as well as banks.
“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area,” Mr. Draghi said during a news conference. “The euro is irreversible.”
Germany’s chancellor, Angela Merkel, affirmed after a meeting with the Spanish prime minister, Mariano Rajoy, in Madrid on Thursday that the central bank acted “with independence and within the framework of its mandate.” But in fact, Germany’s Bundesbank was the lone vote against the central bank’s bond plan, arguing that it was “tantamount to financing governments by printing banknotes.”
The program was designed to reduce the borrowing costs of Spain and Italy, to help them roll over their debts and get their economies moving again after two years of crisis. But such aid would not be automatic.
In essence, the central bank left the next step to the beleaguered governments. They would be required to ask the central bank formally to start buying their bonds in the open market and would have to agree to follow detailed conditions for paying down their debt and hewing to fiscal discipline.
While such programs will be overseen by other European Union governments, it would ultimately be up to the central bank to determine whether the terms of the agreement were acceptable, and whether the government was meeting those conditions over time.
By forcing governments to impose fiscal discipline on each other and remake their economies along lines dictated by the European Central Bank, power will inevitably drift from national capitals to Frankfurt, where the central bank is based, and Brussels, the administrative seat of the European Union.
“The E.C.B. did not disappoint in its decision to start a vast bond purchase program,” Marie Diron, an economist who advises the consulting firm Ernst & Young, wrote in a note.
Markets seemed to agree. Major stock indexes in Europe and the United States rose strongly Thursday after the announcement, and long-term European bonds sharply trimmed their yields.
The need for strong action has arguably increased. Economists at the central bank issued a more pessimistic prognosis for the euro zone economy Thursday, predicting a decline in output of 0.4 percent this year and little or no growth next year.
“We expect the euro area economy to recover only very gradually,” Mr. Draghi said.
A bond-buying program by the European Central Bank has been the subject of vigorous dispute, especially among Germans who remain fearful that such a strategy runs contrary to the bank’s mandate to control inflation, and would falsely prop up the weakest countries in the currency zone. “We act strictly within our mandate to maintain price stability,” Mr. Draghi said.
He did not give an exact starting date for the bond purchase program, saying it depended on action by governments. A government must request help and agree to a “macroeconomic adjustment program” with the European rescue fund, the European Stability Mechanism. But the central bank said this could be a so-called precautionary program, implying that it would be less onerous than the programs agreed to by countries like Portugal or Ireland.
The central bank will buy bonds with maturities of three years or less, and it will withdraw as much money from circulation as it adds by buying bonds. This so-called sterilization is intended to forestall inflation.
The bank will not treat itself as a preferred creditor, entitled to get paid before other bondholders if a country defaults. But it will not take losses on Greek bonds it already holds, even though private creditors were required to do so.