ECB Says Too-Slow Governments a Threat to Europe Revival

European Central Bank policy makers said governments must accelerate plans to strengthen their economies or risk derailing the region’s recovery. “Talking vaguely about structural reforms, but not doing them, is the worst of all worlds,” Executive Board member Benoit Coeure said today in Riga. “It creates uncertainty over the path of real interest rates, without in tandem raising expectations of future growth.” While Coeure said a program to purchase covered bonds will start within days, pressure is mounting on the ECB to also buy sovereign bonds as the 18-nation euro area struggles to recover from a debt crisis and recession. That’s opening fractures in the Governing Council as officials argue that monetary measures will fail unless governments, who submitted their draft budgets to the European Commission this week, play their part. “The ECB and the euro zone are rapidly emulating Japan,” Andrew Bosomworth, a Munich-based portfolio manager at Pacific Investment Management Co., said in an interview. “I think they’re losing credibility because inflation is too low.” Concern that the outlook is worsening contributed to a slump in bonds in peripheral countries and a global stock-market decline of more than $3 trillion so far this month. The euro-area economy stagnated in the second quarter and inflation, at 0.3 percent last month, isn’t seen returning to a goal of just under 2 percent before 2017. Taxpayer Risk European equities jumped today by the most in more than two months and peripheral-nation debt rose after Coeure’s comments on the covered-bond program. Italy’s 10-year yield fell 7 basis points to 2.51 percent at 2:30 p.m. Frankfurt time. The ECB also plans to buy asset-backed securities before the end of the year. Governing Council member Jens Weidmann, who opposed the asset-purchase plan on the grounds that it could increase the risk to taxpayers, said today the strategy runs counter to years of effort to limit taxpayers’ exposure to losses in the financial system. He also said it won’t solve the key issues. “The biggest bottleneck for growth in the euro area is not monetary policy, nor is it the lack of fiscal stimulus,” he said at the conference in the Latvian capital. “It is the structural barriers that impede competition, innovation and productivity.” The European Commission has just started a two-week process to pick apart national spending plans for 2015, with the French and Italian budgets set to cause the biggest headaches. France’s deficit is forecast to hit its target two years late, and Italy’s pace of reduction of its structural deficit is slower than the commission demanded. Legal Act The ECB has also cut interest rates to record lows and offered long-term loans to funnel credit to companies and households. Coeure reiterated a pledge to do more if needed. The central bank today published the legal act allowing covered-bond purchases to start. ECB President Mario Draghi has said he wants to steer the size of the balance sheet back to early-2012 levels, signaling an addition of as much as 1 trillion euros ($1.3 trillion) in assets. “It is likely that the ECB should first concentrate on the secondary market to be able to buy bonds, as no euro area issuers have announced that they will come to the market next week,” said Joost Beaumont, a covered-bond analyst at ABN Amro Bank NV in Amsterdam. “It will be interesting to see whether today’s decision will attract euro-area issuers to the market.” Temporary Measures ECB Vice President Vitor Constancio said at a conference in Frankfurt today that the purchases will affect other asset markets including bonds, equities and foreign exchange. He also warned that the programs shouldn’t been seen as “market making of last resorts.” Executive Board member Yves Mersch said in Zurich today that while “a central bank with a clear mandate to safeguard price stability needs to act forcefully when push comes to shove,” policy makers must be aware of the side-effects. Non-standard measures “have to be temporary,” he said. Council member Ewald Nowotny told reporters in Vienna today that while the ECB “certainly has further options” to promote economic growth, the region is not in a recession and “it’s not as if the ECB would have to open its emergency pharmacy.” Draghi has urged European governments to step up efforts to put their economies on a more solid footing, complementing his ultra-expansionary monetary policy “It is sometimes argued that monetary policy can weaken the incentives to reform,” Coeure said. “I do not share this view.”