The
European Central Bank has unveiled a new bond-buying program in yet another
attempt to ease the eurozone's debt crisis. DW has spoken with several experts
about the latest move's significance.
The
European Central Bank has agreed to a new program to purchase potentially
unlimited bonds of fiscally challenged countries in the eurozone in a bid to
regain control of interest rates and lower borrowing costs.
Pledging to
do whatever it takes to preserve the euro, ECB President Mario Draghi told
reporters on Thursday (06.09.2012) that the new plan, with no set limit, would
address the "unfounded fears" of investors about the euro's survival
and serve as "a fully effective backstop to prevent potentially
destructive scenarios."
 |
| Draghi said the plan will create a backdrop to secure to euro |
Draghi said
the plan, officially called Monetary Outright Transactions, was strictly within
the ECB's mandate to maintain financial stability. But, in the same breath, he
underscored the need for governments to continue with deficit reduction plans
and labor market reforms.
Addicted to
bond buying
Countries
that wish to benefit from the scheme must request a bailout from one of the
eurozone's two rescue funds, the European Financial Stability Facility (EFSF)
or the European Stability Mechanism (ESM) to ensure they continue reforms.
In a
related move, the ECB decided to keep interest rates on hold, leaving its main
rate unchanged at 0.75 percent.
The
decisions, Draghi said, were also prompted by economic contraction; the ECB
expects the eurozone economy to shrink by 0.4 percent this year.
 |
| Weidmann was a key voice against the ECB bond-buying plan |
Draghi was
able to win the support of all but one of the ECB council's members - Jens
Weidmann, the president of the German Bundesbank, who voiced stiff resistance
to bond buying. Weidmann has said he believes the ECB bond-buying scheme could
become an "addictive drug" for governments unwilling to carry out
painful reforms. He is also worried that it could trigger inflation.
Experts
have mixed views on the new scheme.
"Draghi
is very capable and his latest move is the right thing to do," said Thomas
Kirchmaier from the London School of Economics. "Some people worry about
inflation, but that's clearly a non-issue. Inflation rates in the eurozone are
low, and we're actually seeing a degree of deflation."
Sterilizing
the money supply
 |
| Inflation is a major worry in Germany |
Clemens
Fuest with the Said Business School at Oxford University agreed that inflation
isn't a concern in the short term but warned it could become one in the long
term if the ECB cannot "sterilize" the bonds. Sterilization is a step
taken by central banks to avoid an increase in the money supply - and
consequently in inflation.
"This
could happen if countries get used to selling bonds to the ECB and running high
deficits," he said. "Then we would have a situation that could lead
to inflation."
Benedicta
Marzinotto with the European think tank Bruegel said she believes sterilization
will give a lift to the euro. "If the ECB doesn't sterilize, there is more
risk of inflation," she said.
Fuest also
pointed to legal questions about the ECB bond-buying move and how the central
bank interprets the various statutes that give it the leeway to pursue such
action.
 |
| The ECB's plan is to shore up the euro |
"The
ECB is selling this as a 'must' move but it's not evident to me that the
currency union would fall apart or disaster would strike if the bank didn't do
this," he said.
Reflecting
Bundesbank concerns, Johann Eckhoff with the Institute for Economic Policy at
Cologne University warned that the new ECB scheme could reduce pressure on
countries to reduce their debt.
"We
could have the effect of some countries not meeting agreed conditions and the
others having to give in, as we do with Greece," he said. "The
pressure to damn debt is reduced here, and that's dangerous."
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