European Central Bank Executive Board member Joerg Asmussen said the risks attached to the bank’s bond-purchase plan are justified because doing nothing would be worse.
“It is correct that such interventions pose risks for the Eurosystem, but such risks have to be weighed against the risk of doing nothing,” Asmussen said in a speech in Mainz, Germany, today. “If a house is on fire, the fire brigade will step in even if that means the furniture getting wet.”
ECB President Mario Draghi and other officials are seeking to win support in Germany for so-called Outright Monetary Transactions, which are opposed by the Bundesbank as well as some German politicians as newspapers. They argue that the proposal is tantamount to printing money to finance governments, which is prohibited by the ECB’s statutes and exposes the ECB balance sheet to too much risk.
Asmussen said the central bank will do its upmost “to minimize those risks” and that the conditionality attached to the program fulfills that function.
Under the OMT plan, the ECB will only buy a nation’s bonds on the secondary market if the government requests aid from Europe’s rescue fund and signs a Memorandum of Understanding to meet certain conditions. Even then, there is no guarantee the ECB would intervene.
The announcement of the plan in August has helped to calm financial markets and reduce borrowing costs in Spain and Italy before it has even been activated. Still, the Bundesbank said today that financial stability risks in Europe’s largest economy haven’t receded.
Asmussen, a former deputy German finance minister, said the conditions attached to the bond-purchase program mean a country receiving assistance won’t weaken its consolidation and reform efforts.
“If a country doesn’t stick to the conditions, we will not buy,” he said, adding that “the other actors must also do their respective homework” to stem the crisis.
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