Draghi defends monetary policy decision-making

13th January 2012

In particular, he was clear that the bank's 3-year refinancing operation had improved the position of Eurozone banks. Is he right?

Draghi said: "The extensive recourse to the first three year refinancing operation indicates that our non-standard policy measures are providing a substantial contribution to improving the funding situation of the banks, thereby supporting financing conditions and confidence." In other words, the injections of cash into the financial system are beginning to thaw the credit markets and there are signs of economic stablilsation in the region.

The FT went on to say that while Mr Draghi appeared to rule out US- or UK-style "quantitative easing" – creating money to buy assets – the ECB efforts to combat the crisis were focused on encouraging banks to lend to the real economy: "He forecast "substantial" demand in a second offer of three-year loans next month, when a broader range of assets would be eligible as collateral."

Certainly some of his analysis appears correct. Spanish and Italian bond auctions this week suggested that some confidence was returning to the markets. Yields fell and, in particular, Spain's auction saw demand improve. 

His assertion that the Eurozone economies are starting to stabilise is more contentious. Recent data from Germany suggests it is at risk of slipping into a recession, while data from the Eurozone's other major economies has hardly given rise for cheer.

Many believe that the Eurozone is still an experiment that is failing: "The ECB said that they were going to "actively implement" a bond buying program to relieve some of the pressure on Italy, Spain, and others.

"It is this intervention that stopped the skyrocketing yields of Italy and Spain, but many feel that this is simply a temporary halt of the inevitable. The Washington DC based Carnegie Institute estimates it would take $1.4 trillion to prevent Italy from collapse and $800 billion to shore up Spain. Unless the ECB is allowed to print money to help member countries pay off their debt, it appears that both Italy and Spain will eventually meet the same fate as Greece."

The blogosphere is equally unconvinced, suggesting that Draghi had become another deluded Eurozone policymaker. In the FT, for example, community commenter David Potter said: "Oh dear, it did not take long for Draghi to join the dreamers. How on earth can "a large take up of yet more three year borrowing with a wider range security" be anything other than proof positive of what a desperate position we are in. When the borrowing money drug ceases to work we will be in even more dire straits."

On Reuters, Gordon2352 wrote: "Not to burst your bubble, so to speak, that ECB claim of "substantial" effect from cheap money" is nothing more than a temporary bubble, which will increase the eurozone problems, but will do nothing to resolve them."

Ultimately, Draghi had no option but to defend the attempts by Eurozone policymakers to stabilise the system. However, his assurances that the measures have been effective are yet to be reflected in reality. There are tentative signs of stabilisation, but the Eurozone crisis remains far from a resolution.


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