Cracks appear in ECB united front as top banker goes off message

Talks of an exit from the asset buying programme may displease ECB President Mario Draghi, who has long dismissed any notion of reacting hastily to misleading inflation. [INSM/ Flickr]

The European Central Bank (ECB) could soon start planning an exit from its unprecedented stimulus programme, one of its executive board members said yesterday (24 January), in a rare public discussion about ending its asset buying scheme.

A longtime critic of the ECB’s ultra-easy monetary policy, Sabine Lautenschläger has opposed many of the bank’s past easing measures and now becomes the only board member to publicly advocate an exit, a taboo for ECB President Mario Draghi, who has said that tapering, or winding down the €2.3 trillion programme has not been discussed.

“All preconditions for a stable rise in inflation exist,” Lautenschläger, considered one of the top hawks on Frankfurt bank’s governing council, said in a speech. “I am thus optimistic that we can soon turn to the question of an exit.”

But she also noted that a few more positive readings may be needed and the ECB should avoid reacting to a temporary inflation spike as it continues in its quest to stabilise inflation at just under 2%.

Acknowledging a firmer inflation outlook, the ECB last month agreed to cut its asset buys by a quarter from April but also extended the scheme until the end of the year, arguing that underlying inflation is still weak and the recovery is fragile.

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Lautenschläger, who often votes in the minority, said the ECB should not wait until all doubts about the return of inflation have been dispelled because then it risked moving too late.

Having fought the risk of deflation for years, the ECB is now under pressure as higher energy costs feed into other prices, igniting calls for the bank to ease up on the accelerator.

“Loose monetary policy is like a strong medicine for someone who’s very sick,” Lautenschläger. “It works, no doubt, but it also has side effects – and some of the unconventional measures have stronger side effects than others.”

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Any country leaving the eurozone would have to settle its claims or debts with the bloc’s payments system before severing ties, European Central Bank President Mario Draghi has said.

The German banker also insisted that the euro is not in danger and will not fail but cheap credit alone without structural reforms is not enough to revive the 19-member bloc’s economies.

“I’m convinced that the euro will not fail,” Lautenschläger said in her Hamburg address.

Her fellow board member, Peter Praet, also said yesterday that a eurozone-wide public backstop for banks is necessary and bailouts should not be ruled out even when investors are forced to pay for some losses.

Imposing losses on creditors and shareholders was trumpeted as the centrepiece of Europe’s response to the financial crisis but some are questioning whether the new rules will be fully applied after the Italian government’s rescue of the troubled Monte dei Paschi di Siena

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“A certain level of public risk sharing is necessary to create confidence in the overall financial system and thereby unlock the potential of private risk-sharing,” Praet, the ECB’s chief economist, said in a speech in Rome. “Even well-capitalised banks can fall victim to runs and contagion.”