Draghi Hits Back at Critics

European Central Bank President Mario Draghi hit back at German criticism of his plan to intervene in bond markets and reminded Europe's largest economy of its responsibility to anchor the euro.

The ECB “will always act within the limits of its mandate,” Draghi wrote in a commentary for German newspaper Die Zeit provided by the Frankfurt-based ECB today. “Yet it should be understood that fulfilling our mandate sometimes requires us to go beyond standard monetary policy tools.”

Bundesbank President Jens Weidmann and some German politicians have lashed out at Draghi's plan to resume government bond purchases to lower borrowing costs in countries such as Italy and Spain. Draghi's riposte comes as Chancellor Angela Merkel, who has signaled broad support for ECB bond buying, hosts Italian Prime Minister Mario Monti in Berlin today.

“The ECB is not a political institution,” Draghi wrote. “But it is committed to its responsibilities as an institution of the European Union. As such, we never lose sight of our mission to guarantee a strong and stable currency. The banknotes that we issue bear the European flag and are a powerful symbol of European identity.”

Weidmann has said he's against ECB bond purchases because they risk increasing governments' reliance on the central bank and won't solve Europe's debt crisis. “Such policy is too close to state financing via the money press for me,” he told German magazine Der Spiegel in an interview published on Aug. 26.

Draghi's plan aims to win governments time to implement fiscal reforms while also ensuring that any assistance is tied to conditions. It requires distressed governments to request aid from Europe's bailout fund and sign up to a memorandum of understanding before the ECB would act to reduce bond yields in the secondary market if necessary. Draghi is due to present details of the new program after a policy meeting on Sept. 6.

Italy doesn't need to tap the rescue fund at the moment because measures by the government are starting to offset market concerns, Monti said in an interview with Il Sole 24 Ore published today.

The country sold 9 billion euros ($11.3 billion) of Treasury bills at the lowest rate since March today. Yesterday, it priced a zero-coupon 2014 bond to yield 3.064 percent, down almost 2 percentage points from the last sale a month ago.

Systemic Risk

Members of Merkel's Christian Democratic Union and its Free Democratic Party coalition partner said the ECB could become a risk to the financial system if it sticks to plans to resume bond purchases, Handelsblatt reported today. The ECB's attempts to change the foundations of the euro are illegal, Frank Schaeffler, the FDP's parliamentary finance spokesman, told the newspaper.

“The root of Germany's success is its deep integration into the European and world economies,” Draghi wrote. “To continue to prosper, Germany needs to remain an anchor of a strong currency, at the center of a zone of monetary stability and in a dynamic and competitive euro-area economy.”

Only a stronger economic and monetary union can provide this, Draghi said.

“Draghi seems to suggest here that his critics are somehow anti-European,” said Christian Schulz, senior economist at Berenberg Bank in London. “There has been a lot of deliberate misleading by politicians in Germany about what the ECB is doing and also about what the future of the euro is.”

European leaders are working on a revamp of the euro's institutional landscape in an attempt to form a fiscal and banking union to complement the economic and monetary union.

“Those who want to go back to the past misunderstand the significance of the euro,” Draghi wrote. “Those who claim only a full federation can be sustainable set the bar too high. What we need is a gradual and structured effort to complete EMU. This would finally give the euro the stable foundations it deserves.”

Draghi said the ultimate goals that the euro was founded on were stability, prosperity and peace. “We know this is what the people in Europe, and in Germany, aspire to.”

Bloomberg News

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