hurricanemaxi
Joined: 04 Nov 2011
Posts: 120
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 Posted: Sat Nov 05, 2011 3:00 am Post subject: ECB’s Draghi Hopes He Can Do What Europe Needs: View |
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The new head of the European Central Bank demonstrated yesterday that’s he’s ready to step in to support the euro-area economy. We hope that also means he’s willing to do what it takes to save the euro.
After only three days as president of the ECB, Italy’s Mario Draghi oversaw the euro area’s first interest-rate cut in more than two years, lowering the central bank’s target rate by 0.25 percentage point to 1.25 percent. The decision surprised investors and economists, most of whom had expected Draghi to hold rates steady in his debut meeting at the ECB’s helm.
In the subtle game of monetary policy, it was a bold move, and one that could distinguish Draghi from his predecessor, Jean-Claude Trichet. The ECB’s primary mandate is to control inflation, which is currently running at 3 percent, well above the central bank’s 2 percent target. But Draghi, with the unanimous support of the bank’s 23-member Governing Council, put more weight on the deteriorating outlook for the euro-area economy, which he says is headed for a recession.
The big question now is where Draghi will stand on a larger issue: Whether the ECB will pledge the trillions of euros needed to guarantee the financing needs of solvent euro-area governments. The central bank, with the power to print euros, is the only European institution that can credibly make such a promise, which would be the linchpin of any plan to resolve finally the region’s sovereign-debt crisis.
No Backstop
Under Trichet, the ECB had been unwilling to be the euro’s backstop. Together with Germany, the bank has essentially been betting that the threat of financial disaster will maintain pressure on countries such as Italy to agree to reforms, including a European authority that could take over the finances of troubled governments. It’s a laudable goal, but one that could take years to reach, whereas a market meltdown could do irreparable damage to the global economy in a matter of weeks.
On the surface, Draghi’s position is identical to Trichet’s. In a news conference yesterday, he said the central bank can’t do politicians’ jobs and act as the lender of last resort to governments. He characterized the bank’s purchases of government bonds, which amount to some 174 billion euros ($240 billion) so far, as “temporary” and necessary to restore “the functioning of monetary policy transmission channels.”
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