Sat Jul 21st, 2012 at 04:39:00 PM EST
ECB: Interview with Mario Draghi, President of the ECB (Le Monde, 18 July 2012, published 21 July 2012)
Should the ECB not do more to ease the economy, as the IMF has requested?
We are very open. We do not have any taboos. We decided to reduce interest rates to below 1% in July because we forecast that inflation would be close to or below 2% at the start of 2013. It now seems likely that it will fall sooner than expected, at the end of 2012. Our mandate is to maintain price stability in order to prevent both higher inflation and a generalised, broadly based fall in prices. If we see such risks of deflation, we will act.
These are long-term solutions. Doesn’t something need to be done about the urgency of the situation?
Let me tell you about my experience. In 1988 the Delors Committee set out the route towards Monetary Union, with a goal, a timetable and commitments to be respected. This prospect resulted in the Maastricht Treaty in 1992. Italy’s borrowing rates were very high at the time. But as a result of its involvement in the project of Monetary Union, Italy saw an abrupt fall in its rates, before there was even a decrease in the deficit, which stood at 11% of GDP! This leads me to believe that if countries make firm commitments, even of a long-term nature, this has an impact in the short term.
The ECB has been criticised for not doing more for the governments. Is the ECB waiting for government efforts to be made before acting?
This idea that there is bargaining between the governments and the ECB is a “quiproquo”. Our mandate is not to resolve the financial problems of countries, but to ensure price stability and to contribute to the stability of the financial system in full independence.
Yeah, because private banks are part of the financial system and they need to be supported because their bankruptcies are systemically destabilizing events... whereas state bankruptcies are not systemically destabilizing and so treasuries need not be supported like banks.
It may sound insane, but that's in fact what's written in the Maastricht Treaty.
However, Draghi also says this:
On Friday, 20 July, the finance ministers of the euro area should have completed the aid plan for banks. Have they done so? Will it suffice to prevent the country from defaulting?
One important point is the involvement of senior creditors of banks: the ECB believes that such involvement should be possible in the case of the liquidation of a bank. Savers must be protected, but creditors should be part of the solution of the crisis. It is a matter of limiting the involvement of taxpayers. They have already paid a great deal!
So, another interpretation of Draghi's words is that governments should govern and they should restructure the financial sector forcefully and impose creditor bail-ins, something they have refused to do. The ECB is evidently neither the fiscal authority nor the banking supervisor, therefore it's about time governments did their job. Maybe then they wouldn't need to wish that the ECB solves their problems.