FRANKFURT — The European Central Bank on Thursday announced a sweeping program for buying the bonds of troubled eurozone countries, giving the bank potentially unprecedented power.
While the bank’s president, Mario Draghi, insisted that the central bank was not violating a prohibition on its financing governments, it was effectively becoming the lender of last resort to countries as well as banks.
“We will have a fully effective backstop to avoid destructive scenarios with potentially severe challenges for price stability in the euro area,” Draghi said during a news conference. “The euro is irreversible.”
German Chancellor Angela Merkel, affirmed after a meeting with Spanish Prime Minister Mariano Rajoy in Madrid on Thursday that the central bank acted “with independence and within the framework of its mandate.” But Germany’s Bundesbank was the lone vote against the central bank’s bond plan, arguing that it was “tantamount to financing governments by printing banknotes.”
The program was designed to reduce the borrowing costs of Spain and Italy, to help them roll over their debts and get their economies moving again after two years of crisis. But such aid would not be automatic.
In essence, the central bank left the next step to the beleaguered governments. They would be required to ask the central bank formally to start buying their bonds in the open market.
While such programs will be overseen by other EU governments, it would ultimately be up to the central bank to determine whether the terms of the agreement were acceptable and whether the government was meeting those conditions over time.
By forcing governments to impose fiscal discipline on one another and remake their economies along lines dictated by the ECB, power will inevitably drift from national capitals to Frankfurt, where the central bank is based, and Brussels, the administrative seat of the European Union.
“The ECB did not disappoint in its decision to start a vast bond purchase program,” Marie Diron, an economist who advises consulting firm Ernst & Young, wrote in a note.
Markets seemed to agree. Major stock indexes in Europe and the United States rose strongly Thursday after the announcement.
