European Central Bank President Mario Draghi said euro-region governments should continue to take “decisive measures” after the central bank’s liquidity provisions helped restore investor confidence.
While the ECB’s injection of more than 1 trillion euros ($1.3 trillion) into the banking system has calmed markets, “no single institution can carry the burden of addressing a set of challenges that are simultaneously economic, financial and fiscal,” Draghi said in Berlin yesterday. “The current stabilization should not make us pause in our responses.”
Finance ministers from the 17 nations will meet in Copenhagen on March 30 and Chancellor Angela Merkel gave her first indication yesterday that she is prepared to allow an increase in the debt-crisis firewall, saying that Germany could let the temporary and permanent rescue funds run in parallel. Merkel cited “fragility” in Spain and Portugal as she revealed Germany’s position on addressing the future backstop.
Draghi said member states have “taken important steps to strengthen euro-area and global firewalls” as “the entry into force of the European Stability Mechanism has been advanced and the paying-in of capital will be accelerated to reach full lending capacity sooner than originally planned.”
Policy makers are discussing how to add to the funds, for example by allowing the European Financial Stability Facility and ESM to work concurrently to make more money available. Maintaining the used sums from the temporary fund while allowing the ESM to operate at capacity would bring a total crisis backstop to 692 billion euros.
While the ECB’s two three-year loans to banks have helped sooth Europe’s turmoil, it has raised concerns that they could fuel inflation. For now, “market indicators of inflation expectations overall show no signs of inflation above our medium-term objective,” Draghi said, adding that officials are “constantly alert to threats to” inflation.
The ECB “has a range of tools at its disposal to absorb excess liquidity if that is deemed necessary in the future,” he said. “Available tools include increases in reserve requirements and the conduct of liquidity absorbing operations including not only short-term but also longer-term deposits.”
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