Ball is in the court of EU leaders, ECB makes clear

ANALYSIS: Mario Draghi insists national and EU reforms must take precedence over ECB measures

THIS TIME 10 years ago, the European Central Bank was abuzz with the final preparations for the launch of the euro in Frankfurt’s Harmony Hall.

Yesterday, with the euro zone under economic siege and wracked by political disharmony, ECB president Mario Draghi denied his bank was making contingency plans for the currency’s imminent demise.

“What matters is not to have negative, self-fulfilling psychology,” said Mr Draghi. “I don’t think it’s useful to speculate on break-ups because, in spite of everything, it seems quite far-fetched.”

Outside the ECB tower, the makeshift Occupy Frankfurt camp has already erected a euro gravestone. Above it, there is a sign that says: “We are the tip of the iceberg of outrage.”

Back in the happier days of 2001 the late ECB president, Wim Duisenberg, unveiled the euro notes and coins with the joke that, “as a central banker, I have never had any difficulty getting rid of my product”.

A decade on, Duisberg’s joke has become a curse.

Banks in the euro zone are so rattled by the ongoing crisis that, as soon as they get their hands on fresh liquidity from the ECB, they would rather return it to the central bank’s vault at penal overnight rates than lend it to others or to their customers.

Unable to get rid of the bank’s product, Draghi admitted the blockage in money markets was “not far” from the situation after the collapse of Lehman Brothers.

Yesterday’s bank liquidity measures are the ECB’s latest effort to get cash back into the euro zone economies and keep it there. Draghi said it was essential that credit reach its intended targets, from homeowners to small- and medium-sized enterprises, which, he reminded journalists, provide 60 per cent of euro zone employment.

Ensuring enough liquidity is in place is essential, too, with an eye on the first quarter of 2012, when some €230 billion in euro zone bank bonds reach maturity.

After that, the ECB president decided to play hard to get, expressing “puzzlement” at the frenzy of speculation he caused last week in the European Parliament.

In prepared remarks, Draghi told MEPs the ECB could do more to battle the crisis, saying “other elements might follow” further political action. He refused to spell out what he had in mind yesterday, saying the ECB would be the last player to act in the euro zone crisis. National and EU reforms must come first.

“We need a new fiscal compact, comprising a fundamental restatement of the fiscal rules together with the fiscal commitments that euro area governments have made,” he said.

“This is the most important precondition for restoring the normal functioning of financial markets.”

He insisted the ECB would stick to the spirit and letter of its founding treaty to refuse the financing of member states through direct purchases of sovereign bonds or indirect euro zone financing via the IMF.

As the stakes rise, though, Frankfurt’s economic toolbox is looking increasingly empty. Last week the ECB joined forces with leading central banks around the world to cut the price of supplying US dollars to aid liquidity-starved European banks.

But this was overshadowed by news of Standard Poor’s warning of a downgrade for euro zone members, including all AAA guarantors to the European Financial Stability Facility bailout fund.

With the euro zone on the edge, opinion was divided by the ECB strategy. Some analysts reacted with despair, while others welcomed a principled stand against opportunistic politicians.

Either way, the message from Frankfurt to the Brussels summit was clear: the ball is in your court.

“It is fundamental that this summit delivers progress and I wish all our leaders the best,” Draghi said. “The ECB is here, which doesn’t mean that the ECB will respond.”