THE euro strengthened to a two-month high against the US dollar yesterday, as investors’ euphoria overflowed at the ECB’s plan to purchase bonds from debtor states.
This was despite the fact that the German Bundesbank denounced the plan as the inflationary printing of billions more euros, and a deadly threat to the economy.
Central to the ECB plan were strict austerity programme conditions with Greece-style monitoring by IMF inspectors.
Despite the strict conditions, there was widespread condemnation of the plan in the German press, which accused ECB president Mario Draghi of writing a ‘blank cheque’ to troubled eurozone states, with policies to make the euro ‘kaput’.
Germany’s ruling party said that the ECB had gone beyond its mandate of safeguarding the stability of the currency and Die Welt’s headline said ‘Draghi sets off Germany’s alarm bell.’
On Thursday, the ECB stressed harsh conditions: ‘A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. . .
‘The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.’
A German central bank statement on Thursday said: ‘In the most recent discussions, as before, Bundesbank President Jens Weidmann reiterated his frequently substantiated critical stance towards the purchase of government bonds by the Eurosystem.
‘He regards such purchases as being tantamount to financing governments by printing banknotes. Monetary policy risks being subjugated to fiscal policy. The intervention purchases must not be permitted to jeopardise the capability of monetary policy to safeguard price stability in the euro area.
‘If the adopted bond-purchasing programme leads to member states postponing the necessary reforms, this will further undermine confidence in the political leaders’ crisis-resolution capability.
This underscores the crucial importance of ensuring both credibility in the promised conditionality and the resolute determination to immediately terminate intervention purchases if the underlying conditionality is no longer assured.
‘The announced interventions in the government bond market carry the additional danger that the central bank may ultimately redistribute considerable risks among various countries’ taxpayers. Such risk-sharing, however, can be legitimately authorised solely by democratically elected parliaments and governments.’
Chancellor Angela Merkel declared that such measures could ‘not replace’ political activities within the currency zone.