The new head of the European Central Bank, Mario Draghi, signaled on Thursday that the bank is prepared to play a bigger role in Europe’s debt crisis solution if political leaders agree next week on much tighter budget controls in the 17-nation euro zone.
“A new fiscal compact would be the most important signal from euro area governments for embarking on a path of comprehensive deepening of economic integration. It would also present a clear trajectory for the future evolution of the euro area, thus framing expectations,” Draghi told the European Parliament on Thursday.
Though Draghi gave no hint at what action the ECB might take, it has been suggested by more than one of the region’s political leaders that the central bank step up purchases of euro-zone government bonds or lend money to the International Monetary Fund to support Italy and Spain.
Draghi told the European Parliament that, before the ECB or other institutions could take more aggressive steps to ease the continent’s debt load, EU leaders must align their spending policies more closely to bring government debt levels under control in the future.
“Other elements might follow, but the sequencing matters,” Draghi said. “And it is first and foremost important to get a commonly shared fiscal compact right.”
German Chancellor Angela Merkel has been pushing for changes to Europe’s current treaties in order to create a fiscal union. “Our priority is to have the whole of the euro zone to be placed on a stronger treaty basis,” Merkel said on Tuesday in Berlin. “This is what we have devoted all of our efforts to; this is what I’m concentrating on in all of the talks with my counterparts.”
French Finance Minister Francois Baroin has also come out in support of such a plan, telling France-Info radio that countries should integrate their budgets more closely and monitor one another’s spending. “We have to modify euro zone governance,” Baroin said on Tuesday. “We definitely have to move toward more integrated budgetary consolidation, fiscal convergence with our neighbors.”
France and Germany will make proposals on how euro-zone countries can monitor one another under such a system, said Baroin.
While the ECB cannot lend directly to government, nor directly buy their national bonds, it can buy their bonds on the secondary market, lowering borrowing costs. The ECB has already committed just over 200 billion euros to such purchases, but has resisted going further because it believes that would take the pressure off politicians to make much-needed spending cuts.
Draghi said such interventions “can only be limited” and said it was up to governments to first put their finances in order to convince bond markets that they are creditworthy borrowers. “Governments must — individually and collectively — restore their credibility vis-a-vis financial markets,” said Draghi.
At an EU summit on December 9, Germany will press for an agreement on treaty change to establish coercive powers that can veto national budgets in the euro zone that breach rules. Berlin wants the European Commission to be empowered to reject national budgets before they go to parliament, and to refer serial deficit offenders to the European Court of Justice.
France, which is working on joint proposals with Germany, prefers an intergovernmental approach, leaving the final word with elected leaders rather than the union’s executive and judicial bodies.
Though Germany’s plans for a fiscal union would allow the ECB to intervene in bond markets, Germany’s leaders find such an idea unappealing, arguing that it lets more profligate nations off the hook for their bad practices.