News Column

Investors 'Fundamentally Confident' in Euro, Draghi Says

Sept. 25, 2012

European Central Bank President Mario Draghi welcomed Tuesday an easing of market tensions in the wake of ECB hints it might embark upon unlimited bond buying, saying the eurozone was making "progress."

"The fact that we have seen positive signs so quickly is revealing. It shows that investors are fundamentally confident in the overall trajectory of the euro area. They are ready to reinvest at the first signs of stabilization," he said.

"This underscores my central message today: the euro area is making progress - and investors are recognizing that progress," Draghi told an audience in Berlin of German industrialists - who have been among the most hostile to his change in ECB policies.

Draghi earlier met with Chancellor Angela Merkel at her office. They did not meet the press afterwards, but Merkel's spokesman said the two were in agreement that European nations needed to show more will for reforms to improve their economic competitiveness and to regain credibility.

Germany's Bundesbank chief, Jens Weidmann, was the only ECB board member to vote against the recent decision on bond-buying.

Draghi gave his speech to the Confederation of German Industry BDI, which had earlier in the day endorsed Weidmann's stance.

"I understand that some observers in this country have concerns about the medium-term implications of this policy," Draghi said.

He denied the ECB was exceeding its powers, saying, "New steps have been needed to maintain price stability in the face of fragmented financial markets. These new steps are not a departure from our mandate.

"Indeed, they are the only way to ensure that we continue to fulfil our mandate. All the measures I have described today are fundamentally about ensuring stability."

Draghi also argued that extreme differences in interest rates between Germany and Spain were not justified.

Michael Heise, the chief economist of Europe's biggest insurance group, Allianz, estimated Tuesday that the German federal government would ultimately save 67 billion euros (87 billion dollars) thanks to the sovereign debt crisis.

Berlin has paid close to zero interest to borrow money as the crisis grinds on.

He said the annual windfall was "well over 10 billion euros." The total payoff comes by adding up future savings over the various terms of federally issued bonds. Conversely, southern governments must pay far higher interest rates.

But Allianz noted that German private households had lost well over 12 billion euros per year from a lack of profitable investment opportunities.

Earlier, German newspaper Bild reported that ECB lawyers are reviewing the legality of the controversial bond plan, which requires eurozone countries to submit to external supervision as a condition for ECB action to lower their interest rates.

EU treaties ban direct lending by the ECB to governments, but allow it to buy a wide range of bonds. The ECB and Bundesbank legal departments were assessing "at what scale and at what duration" the proposed ECB bond purchases would become a treaty breach.

The paper said the lawyers did not exclude putting the issue to the European Court of Justice (ECJ). Germany's federal constitutional court warned this month it might scrutinize whether the ECB has the power to buy bonds.

Both the ECB and the Bundesbank declined requests for comment on the Bild report.

Source: Copyright 2012 dpa Deutsche Presse-Agentur GmbH

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