Bloomberg News

Bundesbank’s Dombret Says ECB Liquidity Provision Carries Risks

June 12, 2012

Bundesbank board member Andreas Dombret said the European Central Bank’s long term loans carry risks that might exacerbate the crisis.

“Over the medium to long term, continued provision of ample liquidity might, through various channels, deanchor inflation expectations, which would translate into higher inflation risks,” Dombret said in a speech in London today. “It could also pave the way for new asset bubbles, thereby sowing the seeds of the next crisis.”

The ECB has flooded the banking system with more than 1 trillion euros ($1.25 trillion) in cheap three-year loans to avert a credit crunch. ECB President Mario Draghi signaled last week that officials don’t intend to add to stimulus for now, stressing that it’s up the euro-area governments to implement reforms that strengthen the foundations of the single currency.

Increasing the region’s rescue funds isn’t an option to overcome the crisis, Dombret said.

“Policy makers should refrain from a wild goose chase in pursuit of ever higher firewalls,” Dombret said. “Making the firewalls higher and higher will not resolve the crisis” and “only buys time until sustainable measures become effective,” he said.

European leaders are struggling to devise a strategy to overcome a fiscal crisis, now in its third year, that has forced Spain to become the fourth member country to seek a bailout. Officials are also facing uncertainty on the outcome of Greece’s June 17 elections, which could hand more power to parties opposed to conditions of the nation’s rescue package and precipitate its exit from the monetary union.

Monetary policy can’t substitute for national fiscal policies, Dombret said. “This is true with regard to Spain, and it is particularly true with regard to Greece,” he said.

“The country needs to stick to the agreed austerity and structural reform measures -– no ifs, no buts,” he said. “There is no basis for external aid without the agreed reform program.”

To contact the reporter on this story: Jana Randow in Frankfurt at jrandow@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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