European Central Bank head suggests wider rescue is possible, pending spending discipline
FRANKFURT, Germany — Mario Draghi, the president of the European Central Bank, laid the groundwork for a more aggressive response to the debt crisis Thursday, suggesting that the bank could increase its support for the European economy if political leaders took more radical steps to enforce spending discipline among members.
In the run-up to a meeting of European leaders late next week, Draghi’s remarks seemed to be part of a larger effort by the ECB and the region’s biggest economic powers — Germany and France — to lay the foundation for a broader rescue without seeming to compromise their principles.
Later Thursday, the French president, Nicolas Sarkozy — acknowledging the region’s debt crisis — announced that he and the German chancellor, Angela Merkel, would meet in Paris on Monday “to make French-German propositions to guarantee the future of Europe.”
Last weekend, Germany and France began floating a plan to hold member nations of the euro currency union more financially accountable to their fellow members by giving European Union officials the power to vet and approve their national budgets. Eurozone agreement to such a proposal is seen as a possible precondition to increased financing by the ECB, to which Germany and France are the biggest contributors.
Draghi, in the manner of central bankers, made no explicit promises Thursday. And the quid pro quo he offered governments was indirect. But his remarks illuminated how the ECB might answer increasingly desperate calls for the bank to escalate its intervention in bond markets without violating its own mandate or alienating Germany, where opposition to an ECB bailout of Greece or Italy continues to run deep.
Speaking to the European Parliament in Brussels, Draghi stopped well short of offering a European version of the sort of large securities purchases that the Federal Reserve has used to try stimulating the U.S. economy.
But he seemed to be saying that the ECB would use its virtually unlimited financial resources to keep financial markets at bay, if government leaders in the euro region agreed to do their part by addressing the structural flaws that allowed the debt problems of Greece to mutate into a threat to the global economy.
“What I believe our economic and monetary union needs is a new fiscal compact,” Draghi said. “It is time to adapt the euro area design with a set of institutions, rules and processes that is commensurate with the requirements of monetary union.”
After government leaders take steps to improve the way the euro area is managed, “other elements might follow,” Draghi said.
European leaders will hold a summit meeting Dec. 9, which is now seen as the latest deadline — there have been many during the nearly two-year euro debt saga — for stemming the crisis.
Europe appeared to have bought a bit more time Wednesday, when the Federal Reserve, the ECB and four other central banks agreed to free up more dollar lending to European banks. But the stock market rally that followed that move did not carry over to Thursday — although successful government bond auctions in Spain and France did indicate at least a temporary calm in the debt storm.
By insisting that greater action would depend on rules to enforce spending discipline among euro members, Draghi might at least partly address German concerns that greater ECB action would reward countries that have mismanaged their finances and violate a prohibition against financing governments.
“Mr. Draghi appeared to be holding up the possibility of a greater degree of ECB intervention if euro area governments were to commit, at next week’s key EU summit, to a tougher set of fiscal rules,” analysts at Barclays Capital said in a research note.
After insisting for weeks that the ECB is not authorized, under the European Union treaty, to bail out national governments, Draghi on Thursday hinted at how the treaty mandate might nonetheless let the central bank to do just that. He noted that the ECB’s mandate required it to ensure price stability “in either direction.”
Typically, the ECB has seen its main job as keeping a lid on inflation. But “either direction” might mean that if inflation fell below the central bank’s official target of about two percent, the ECB would be required to take action to prevent deflation. That would be justification for the central bank to do what so many experts have been urging: buy government bonds on the open market in greater amounts. That would effectively ease the debt crisis for those governments, while also stimulating the eurozone economy by pumping hundreds of billions of euros into it — printing money, as economists call it.