Bond purchases will boost benefits from reforms: ECB

11th March 2015, Comments 0 comments

The European Central Bank's massive bond purchase programme will not reduce incentive on eurozone governments to reform as it will magnify the benefits of measures undertaken, ECB president Mario Draghi said Wednesday.

"The beneficial impact of our asset purchases on financing conditions, rather than reducing the incentives for reforms, will actually increase the benefits of such reforms," Draghi told a banking conference in Frankfurt.

The ECB has embarked on a policy of so-called quantitative easing or QE, under which it plans to buy 1.14 trillion euros worth of bonds over the next 18 months. The aim is to pump liquidity into the system so as to ward off deflation and spur growth in the single currency area.

But QE has its critics, particularly in Germany, who argue that it reduces the pressure on eurozone governments to get their finances and economies in order.

"Once more, the 'Eurosystem' (of central banks) is paying in advance," the head of the German central bank or Bundesbank, Jens Weidmann, complained on Monday.

"Governments and the EU Commission must now use the time to bolster the long-term growth conditions in the euro area," Weidmann insisted.

Draghi countered that "effective, price stability-oriented monetary policy and structural reforms work hand in hand."

"Our recent monetary policy measures are a valid and effective tool to bring inflation closer to our policy goal. They can support a faster and more sustained recovery. This will especially be the case if they fall on fertile ground," the ECB chief said.

With an environment of low interest rates and plenty of liquidity, "governments can create a more investment-friendly environment by swiftly, credibly and effectively implementing structural reforms... Firms will be encouraged to increase investment, bringing forward the economic recovery," Draghi said.

Draghi insisted that the bond purchases, which were announced in January and began on Monday, were already having a positive effect.

Bond yields in countries such as Germany and Italy had fallen noticeably, he argued.

"We also saw a further fall in the sovereign yields of Portugal and other formerly distressed countries -- in spite of the renewed Greek crisis. This suggests that the asset purchase programme may be shielding other euro area countries from contagion, which also helps us achieve our monetary policy goals across the euro area," the ECB chief said.

And Draghi added: "We are aware that our measures may entail some financial stability risks. But currently these risks are contained."

© 2015 AFP

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