Debate raged on among Europe's top bankers on Monday over the merits of a proposed plan for the European Central Bank to buy government bonds to lower borrowing costs for financially troubled governments.
Germany's national central bank, the Bundesbank, is increasingly isolated in its opposition to the plan, saying it would expose taxpayers to potential risks and could leave countries dependent on the financial relief as though on a drug.
Bundesbank head Jens Weidmann says bond purchases would also be too close to an outright bailout of governments, which the ECB is forbidden from doing by treaty.
The European Union treaty's provisions are meant to prevent the ECB from printing money to cover government debts, a practice which can cause inflation and compromise the bank's political independence. It is also meant to keep it from bailing out one member country at the expense of the others without governments having a say.
But Joerg Asmussen, the top German at the ECB and a member of the six-strong executive board, which runs the bank daily, countered that any purchases of government bonds will be carefully designed to avoid violating the treaty.
Asmussen said details were still being worked out and will be discussed at the next meeting of the bank's governing council on Sept. 6. However, he said "any concerns about treaty-violating financing of governments will be removed."
"We will only act within our mandate," he said in the text of a speech to be given in Hamburg.
Both Weidmann and Asmussen are part of the ECB's broader 23-member governing council, which sets policies monthly. When they meet in that capacity, neither represents German interests but those of the 17-country eurozone as a whole.
The remarks by Asmussen suggest German elite opinion is not unanimously against the idea. Chancellor Angela Merkel sounds open to the ECB plan as well, and Weidmann was the only member of the governing council to oppose the idea.
Weidmann warned in an interview in der Spiegel magazine that bond purchases could "be as addictive as a drug" because they can lead to governments depending on such outside help rather than doing politically painful things such as cutting budget deficits.
He has only one seat on the ECB's 23-member government council, but has support from many economists, legislators and voters in Germany. Analysts say any measures to fight the eurozone debt crisis will have difficulty succeeding if Germans aren't broadly willing to support them. German opinion counts because it's the biggest eurozone country and ultimately the biggest financial backer of any bailout effort.
Asmussen conceded that the bank's emergency tactics meant that some might doubt the bank's commitment to its policy "pillars" — fighting inflation, remaining independent of politicians, and not engaging in bailouts.
"I am aware, that many ask, to themselves or publicly, whether these pillars are still standing...We must take these concerns seriously," he said.
ECB president Mario Draghi said on Aug. 2 that the bank may buy government bonds to drive down excessively high borrowing rates for heavily indebted governments. The purchases would push bond prices up and lower interest yields, since yield and price move in opposite directions. Lower yields would then be reflected in government borrowing costs when they sell bonds.
Draghi said the purchases would be aimed at making sure the central bank's low interest rates are reflected in other short-term interest rates throughout the eurozone — a purpose consistent with its legal mandate. Countries that want the help must apply first to the eurozone bailout fund and agree to conditions that would reduce their deficits and debts.
Spain and Italy are struggling to borrow money at affordable cost because bond investors fear they may default. Yet the governments must constantly sell new bonds to pay off old ones that are coming due.
The treaty explicitly forbids the ECB from opening a line of credit to governments or buying government bonds at primary auctions, where the bonds are issued to investors. However, the treaty does allow the ECB to purchase securities, including government bonds, from other investors in the secondary market to carry out its interest rate policy. The exact limits of its mandate have become a topic of intense debate.
Weidmann said in his interview that he was not just relying on legal arguments but on economic ones — that such aid would lower governments' resolve to act to fix their finances. He also said that the risk of losses on any bonds that are bought would be ultimately shared by eurozone taxpayers — meaning such decisions should be made by elected parliaments who can legitimately commit taxpayer money.
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