ECB, Bundesbank Leaders Butt Heads on Bond Sales

Bundesbank opinion: bond-buying didn't work

European Central Bank President Jean-Claude Trichet stated Sunday that the governing council as a whole did not agree with the views of Bundesbank chief, Axel Weber, who said last week that the ECB’s government bond-buying policy did not work and should be stopped.

A Sunday interview with Italian daily La Stampa, conducted Thursday and posted in an English transcript on Sunday on the ECB website, quoted Trichet as defending more ambitious reforms and enforcement of debt reduction in order to forestall instability. But Trichet took issue with Weber’s suggestion that buying government bonds on the secondary market should be discarded as a policy, replying to the interviewer, “No! This is not the position of the Governing Council, with an overwhelming majority. This non-standard measure, like all other such measures, was designed to help restore a more normal functioning of our monetary policy transmission mechanism. And we are withdrawing all the liquidity, euro for euro, that is supplied through this program.”

The interview also explored Trichet’s position on interest rate policy, characterized as “less hawkish” than Weber’s. And indeed, Weber suggested that interest rate increases “could not be as far away as markets seem to think.” There, too, Trichet took issue, saying, “What is important, of course, is that there is only one single currency; there is one Governing Council, only one monetary policy decision, and one President, who is also the porte-parole of the Governing Council. At the last ECB press conference, I said very clearly that current interest rates are appropriate.”

Regarding the possibility of “financial bubbles . . . growing in the emerging markets” and a comment by Italy’s treasury minister, Giulio Tremonti, that speculation is rife once more, Trichet responded, “As regards the ECB, we have demonstrated in the past that we are very keen not to embark on policies that would foster volatility and financial instability. The euro area countries can count on the ECB to deliver price stability and to solidly anchor inflation expectations, a necessary condition for financial stability, even if it is not a sufficient condition.”

Trichet also warned of excess volatility and “disorderly movements in exchange rates” when speaking of the dollar, and said that he considered it important that the U.S. had “reconfirmed their long-standing position” that a strong dollar was in the interests of the U.S.

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