Questions Arise for ECB Role in European Crisis

Recent statements by European Central Bank president Mario Draghi and Bank governor Ewald Nowotny have reopened the debate about the desirable limits to ECB policy. The issue is not just the ECB’s legal authority under the Maastricht Treaty, but, more importantly, the appropriateness of alternative measures.

Nowotny, the president of the National Bank of Austria, suggested that the European Stability Mechanism (ESM) might (if the German constitutional court allows it to come into existence) be given a banking license, which would allow it to borrow from the ECB and greatly expand its ability to purchase eurozone sovereign bonds. Draghi later declared that the ECB can and will do whatever is necessary to prevent high sovereign-risk premia from “hampering the functioning of monetary policy”.

Draghi’s statement reprised the rationale used by his predecessor, Jean-Claude Trichet, to justify ECB purchases of eurozone members’ sovereign debt. Not surprisingly, financial markets interpreted his declaration to mean that the ECB would buy Spanish and Italian government bonds again under its Securities Markets Programme, as it did earlier this year. Although the previous purchase of more than €200bn (£156bn) had no lasting effect on these countries’ risk premia, the presumption is that the effort this time could be much larger. But is that what the ECB should be doing?

via The Guardian

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza