12 June 2013

SZ: Warning words from Washington

Translated from the German

The Managing Director of the International Monetary Fund (IMF), Christine Lagarde, has warned the Federal Constitutional Court indirectly not to hinder the work of the European Central Bank (ECB) in the fight against the EU debt crisis.

Lagarde told the Süddeutsche Zeitung that only the intervention of the ECB had stabilised the situation in the monetary union and prevented any potential sovereign defaults. Without the testimony of ECB president Mario Draghi to buy, if necessary, unlimited bonds of struggling euro countries "there would be economic stagnation, higher unemployment and more social tension" in the whole eurozone. The announcement of the so-called OMT programme had been "the turning point".

In the ongoing global economic and financial crisis, it had been above all "the courage of monetary policy that has paved the road to recovery", Lagarde told the paper. Although the actions of the central banks contained risks such as inflation, they were definitely manageable.

In mid-2012, when bond yields for countries like Italy and Spain reached record levels, there was the risk that the eurozone might actually break apart, said the IMF chief. At that time, traditional means of monetary policy such as rate cuts had no longer shown effect. "The ECB's decision to step into the breach changed everything", said Lagarde. "The OMT programme prevented a disaster and helped ensure that monetary policy could become effective again." Today, bond yields are at their lowest level since 2010 and capital flight from the southern European countries has been stopped and even begins to reverse. 

It was quite clear, continued Lagarde, that central banks would not be able to solve the real problems of ​​fiscal consolidation, strengthening of the banking sector and improving competitiveness. They could only buy some time that was necessary to implement further necessary structural reforms.

Full article (in German)

© Süddeutsche Zeitung GmbH