FRANKFURT (MNI) – Whether the European Central Bank agrees to ramp
up its bond-buying program in response to the crisis is a decision that
will depend on financial and economic developments, ECB Executive Board
member Lorenzo Bini Smaghi said in an interview released late Tuesday by
German weekly Die Zeit.

Ultimately, Bini Smaghi said, buying more bonds “is a decision that
has to be taken on the basis of circumstances. There are no doubts that
in the current crisis markets are dysfunctional. The central bank cannot
ignore this. This is why we have implemented the [Securities Market
Programme].”

The ECB’s provision of liquidity is itself an important way of
enabling banks to finance the economy and could also help boost
sovereign bond markets since banks are big buyers of government bonds,
he said. But it is only effective if banks are willing to take risks, he
added.

“What is important is the target,” he said. “Our target is to
achieve price stability and to implement a single monetary policy for
the euro area as a whole.”

However, if borrowing costs in some countries spiral out of
control, whether for governments or for firms and households, that would
prevent a single monetary policy, he said, seeming to suggest that such
circumstances would in fact induce the ECB to buy more bonds.

How the ECB implements a single monetary policy “is a matter of
technicalities and many of our critics from all sides often do not have
sufficient knowledge in this domain,” he said.

The ECB in any case is independent, whether it does what observers
like or not, he stressed. Occasional differences of opinion on the
Governing Council are “not the problem,” he said. “What matters is that
the ECB acts united, once it decides.”

Bini Smaghi continued with a clear swipe at former Bundesbank
President Axel Weber, who had made very public his opposition to the
ECB’s bond-buying program: “If any problem has emerged in the past, it
is because some Governing Council members have inappropriately publicly
voiced their position on specific issues as if they were representing
the views of their own country. This is the type of behaviour which
undermined the independence of the ECB.”

The ECB must accommodate investors’ desperate search for liquidity
stemming from their loss of confidence, and doing so is not
inflationary, he said.

“Investors want to hold liquidity because they are afraid of the
future,” he explained. “The liquidity in other words is not used to buy
goods and services, but for precautionary reasons, and therefore it is
not inflationary. If the central bank does not provide this liquidity,
banks sell their assets and this depresses the economy further, making
it more difficult to achieve price stability.”

Turning to the EU leaders’ summit of last week, Bini Smaghi warned
that absent rapid implementation, the newest package of decisions might
be doomed to the same fate as previous measures, which were “taken late
and under the pressure of the markets, thus exposing the system to new
weaknesses.”

The attention devoted to fiscal issues at the summit “is important
but not sufficient,” Bini Smaghi said, arguing that the new rules would
have prevented the Greek problem but not the Irish or Spanish ones,
which were related to the bursting of real estate bubbles, not bad
fiscal policies.

Long-term measures like the ones decided at last week’s summit “are
needed, but they may take a long time before they restore the confidence
of the markets,” he said. “If the sovereign refinancing costs continue
to remain elevated, in spite of the drastic fiscal adjustment packages,
new self- fulfilling destabilizing expectations may emerge which then
need to be tackled.”

Italy can and must save itself, Bini Smaghi, an Italian national,
said. But he cautioned that speed is of the essence: “Markets are very
impatient and the longer the interest rate stays high the more difficult
it is to regain confidence. Markets need to be convinced quickly.”

However, the citizens realize reforms are needed and the government
— which he said needed to shrink — is committed to implementing them,
he affirmed.

Regaining competitiveness is difficult nowadays, Bini Smaghi said,
“especially because some Emerging market economies are creating unfair
competition by pegging their exchange rates at an undervalued level.”

–Frankfurt bureau tel.: +49-69-720142. Email: dbarwick@marketnews.com

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