Interview with ECB President Mario Draghi 'We Couldn't Just Sit Back and Do Nothing'
In an interview with SPIEGEL, President of the European Central Bank Mario Draghi defends his euro crisis policies and promises to keep prices stable. He also says he's on Germany's side when it comes to encouraging reforms in the euro zone.
SPIEGEL: President Draghi, do you have a savings account?
SPIEGEL: Do you know much interest you are getting?
Draghi: Around 1.75 percent. That's the current rate on savings in Italy.
SPIEGEL: The rate on a German savings account is even lower than that. The returns are not anywhere near sufficient to make up for rising prices. Are savers picking up the bill for the euro crisis?
Draghi: No. If we do not resolve the euro crisis, we will all pay the price. And if we do resolve it, we will all benefit, particularly German taxpayers and savers.
SPIEGEL: Nevertheless, many people, particularly in Germany, are worried about the value of their money because the European Central Bank has reduced interest rates to a historically low level and announced its intention to make large-scale purchases of government bonds issued by indebted southern European countries. Are people right to be worried?
Draghi: We take the worries of the people very seriously. People are right to ask why we felt it necessary to announce the program for government bond purchases.
SPIEGEL: Then please explain it to us.
Draghi: The crisis of confidence means that money is flowing to Germany. This depresses interest rates in Germany and increases interest rates in other countries to unjustifiably high levels. Put simply, interest rates reflected, among other things, speculation that the euro area could break up. This speculation was unfounded, and we had to counter it.
SPIEGEL: And so you decided to help out the governments in Rome and Madrid.
Draghi: No, the decisive factor was something else. The high bond yields also caused interest rates on corporate and housing loans to shoot up. This put the effectiveness of our monetary policy at risk: No matter how much we cut interest rates, there was no longer any effect on the real economy. We couldn't just sit back and do nothing.
SPIEGEL: Many experts have expressed doubts that the interest rates on loans in Spain and Italy were really at alarming levels.
Draghi: There is no reason for this; we have a great deal of evidence. Take the bank in Spain that could barely issue a bond, although it was, objectively speaking, just as solvent as a credit institution in Germany. No wonder that banks charge completely different interest rates on loans depending on which side of the border they are resident. Also, for this reason, a married couple can get totally different mortgage conditions for an apartment in Madrid than in Munich.
SPIEGEL: It is not unusual for interest rates on loans to vary from country to country.
Draghi: That is true, but the scale of the differences had exceeded all normal levels. Interest rates do not have to be identical across the whole euro area, but it is unacceptable if major differences arise from broken capital markets or concern about a euro area break-up. In addition, short-term rates were higher than long-term rates in some countries, which we always see as a warning sign. All of our analysis indicated that we were facing a serious crisis of confidence, and that we urgently needed to do something about it.
SPIEGEL: But many people, particularly in Germany, believe that your measures are illegal. You are circumventing the prohibition on financing government deficits by printing money.
Draghi: That is incorrect. We are prohibited from buying bonds directly from governments, and we abide by this prohibition. But we are allowed to purchase bonds on what is known as the secondary market -- that is, from banks or financial institutions -- if it is necessary for our monetary policy. And that's exactly what we are doing.
SPIEGEL: The question is why you had to frighten people with the comment that you were preparing to purchase "unlimited amounts." Didn't you realize that this would make people anxious?
Draghi: I chose the word "unlimited" in order to clearly indicate our determination to defend the euro. One has to understand how markets work. But unlimited does not mean uncontrolled. On the contrary, we will only buy bonds from those countries that accept strict conditions, and we will check very carefully whether those conditions are adhered to.
SPIEGEL: We have our doubts about that. Would you really refuse to help a country that does not fulfil the reform requirements?
Draghi: Of course. If a country does not adhere to what has been agreed, we will not resume the program. We have announced that we will suspend operations once a program country is under review. We will then ask the International Monetary Fund and the European Commission to assess whether the country is keeping the conditions of the agreement, and only after a positive assessment will we resume operations.
SPIEGEL: One only needs to consider the example of Greece currently to get an idea of how credible such statements are. The government in Athens repeatedly broke their commitments to the troika, made up of the IMF, ECB and European Commission, and yet they are now about to receive the next tranche of financial assistance anyway.
Draghi: That is not an appropriate comparison. Greece will not be considered at all for our program because it is targeted exclusively at countries that finance themselves, now as before, on the capital market. This is something completely different.
SPIEGEL: Many people are nevertheless concerned that the ECB wants to take a vast amount of high-risk government bonds from southern Europe onto its balance sheet. You already have around 200 billion in securities from countries such as Portugal and Ireland on your books. Will it be the taxpayer who ultimately has to jump in if the countries cannot service their debt?
Draghi: I do not anticipate this; quite the opposite. So far we have actually made a profit on our bond purchases, which has gone to the national central banks, in turn profiting the governments and taxpayers.
SPIEGEL: Can you guarantee it will stay this way?
Draghi: One thing is clear: If the governments in southern Europe continue with the successful implementation of policy reforms seen in the last few months, German taxpayers will make a profit from our purchases. There is no better protection against the euro crisis than successful structural reforms in southern Europe.
SPIEGEL: This can also be expressed in a different way: Your balance sheet is dependent upon political developments in Madrid, Rome and Lisbon. Do you think it is wise for a central bank to make itself dependent on governments in this way?
Draghi: We are not making ourselves dependent, quite the opposite. When the crisis escalated in early summer, the ECB had three options: First, do nothing, allowing the crisis to get worse and worse with greater risks, particularly for the German taxpayer; second, provide support unconditionally; or third, provide support under certain conditions. The ECB chose the third option because that was the best way to combat the causes of the crisis. Governments must commit to sound economic and financial policies. This is how we ensure reform in the euro area -- and our independence.
- Part 1: 'We Couldn't Just Sit Back and Do Nothing'
- Part 2: 'We Have Decided Not to Give Exact Figures For Our Program'