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25th Jan 2021

ECB will not become bank of last resort, Draghi says

  • 'Super Mario' has failed to impress economists such as Sony Kapoor (Photo: European Parliament)

In his highly anticipated first appearance as head of the European Central Bank, Mario Draghi Thursday (3 November) indicated that there will be no radical policy change under his watch, in particular ruling out becoming the lender of last resort for eurozone governments.

"What makes you think that to become the lender of last resort for governments is actually the thing that you need to keep the eurozone together?" he said in response to a question on the issue following a meeting of the eurozone bank's governing council.

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"No I don't think that is in the remit of the ECB. The remit of the ECB is maintaining price stability over the medium term," he added.

Some commentators suggest the eurozone debt crisis has deteriorated to such an extent that only blanket coverage by the ECB, which theoretically has an unlimited amount of money, can stop markets from further driving up government borrowing costs - already at almost unsustainable levels in Italy, the eurozone's third largest economy.

The eurozone's bail-out fund with its €440 billion in firepower - which the region hopes can be leveraged to €1 trillion following an agreement of eurozone leaders last week - is widely seen as too small to deal with the problem.

Draghi also dampened hopes of more aggressive buying of government bonds - a policy started by his predecessor Jean-Claude Trichet - by saying the bank's programme to buy government sovereign debt is "temporary" and "limited in its amount."

The Italian, who took up the ECB reins on Tuesday, surprised markets by lowering the key interest rate by 25 basis points to 1.25 percent.

He said that Europe's financial crisis and a slowdown in growth mean the eurozone faces an "environment of high uncertainty." The rate cut is aimed at preventing the economic crisis from worsening still further, with Draghi predicting "slow growth" heading towards a "mild recession" by the end of the year.

The move took markets and analysts by surprise, with the bank traditionally keen to focus on keeping down inflation rather than boosting growth. Draghi predicted that inflation would only come below two percent over the course of next year.

Greece and the eurozone

Greece was also the focus of several questions to the ECB chief, with talk of it leaving the eurozone gaining traction after a surprise announcement earlier this week that it could hold a referendum on its second bail-out programme.

Draghi would not be drawn to comment on Athens' possible exit, noting only that leaving the eurozone exit is not a scenario envisaged by the EU treaty.

"It's not in the treaty. I have nothing to add to that. It is not in the treaty," he said.

Challenged that he was taking too much a legalistic approach to a very real political question, Draghi said: "We are using the treaties as a reference point for decisions."

"An issue such as the break up of the eurozone is not a marginal one, so that's where the power of our treaties comes into question."

Asked whether his style would be different to Trichet, the French chief who stepped down after eight years, Draghi, who has been on the bank's 23-member governing council since 2005, emphasised the importance of "continuity, credibility and consistency."

Some analysts gave him only a pass mark after his first public appearance.

"The ECB refused to blink and the euro crisis is now likely to intensify. Without a much bigger commitment from the ECB, we are all in big trouble," said Sony Kapoor, the managing director of Re-Define, an economic think-tank.

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