PARIS (MNI) – European Central Bank Governing Council member Yves
Mersch took a hard line on the ECB’s bond purchasing program, telling an
Italian newspaper that the central bank could stop buying sovereign debt
if it concluded that a country being helped by it was not cooperating
with complementary policy reforms.

Echoing the recent words of new ECB President Mario Draghi, Mersch
told the daily La Stampa that the bond buys “should be limited in
quantity and in time, and have as their sole objective to guarantee the
full transmission mechanism of monetary policy. If we observe that our
interventions are being undermined by the lacking efforts of national
governments, we should ask ourselves about the problem of incentives.”

Somewhat more threateningly, he added: “If the board of the ECB
concludes that the conditions that induced it to take a decision no
longer exist, it is free to change this decision at any moment.”

Mersch, who heads the Central Bank of Luxembourg, did not mention
any country by name. However, since August the ECB has been buying large
volumes of Italian bonds in an effort to keep Italy’s borrowing costs
from soaring to unmanageable levels. But it has been frustrated so far
at the inability of Prime Minister Silvio Berlusconi to deliver the
kinds of fiscal measures and reforms it has promised in order to keep
the country’s giant debt load — 120% of GDP — under control.

On the other hand, Mersch told the newspaper that the ECB would not
automatically stop buying bonds once Europe’s bailout fund, the European
Financial Stability Facility (ESFS), is fully operational. “Be aware
that on this aspect in particular, no specific link exists. We become
active if the governments behave in a way so as to guarantee the
financial stability of the Eurozone,” he said.

Mersch defended Draghi from the criticism of some analysts who say,
especially in light of the ECB’s 25 basis point interest rate cut last
week, that the ECB president focuses more on the economic outlook than
on price stability.

“Like his predecessor [Jean-Claude Trichet], he is committed to the
continuation of a monetary policy that is concerned principally with
guaranteeing price stability,” Mersch said.

He said the crisis has changed the climate to such an extent that
it is no longer feasible for national governments alone to be
responsible for policies that have repercussions for the whole Eurozone.

“The current treaties are not reconciliable with a crisis that has
taken on European dimensions,” Mersch said. “It is not even thinkable
that the democratic legitimization of some decisions can be left at the
national level without even a process of legitimization on the European
level.”

He argued for a modification of existing treaties in order to
create a division of responsibility between the national and European
levels.

Mersch defended his fellow ECB colleague, Executive Board member
Lorenzo Bini Smaghi, who has been under pressure to resign his post
because of the ascension to the presidency of fellow-Italian Draghi.
Some believe that the six-member ECB board was not meant to have more
than one person of the same nationality.

“His mandate is for eight years,” Mersch said. “It is not written
in the treaty that if somebody comes from a specific treasury ministry
he has the right to a seat on the board. The spirit of the treaty is
that each one of us should check our passports at the cloakroom when we
are participating in the [ECB] meetings.”

Mersch, often viewed as a hawk whose views are largely in line with
the Germans on the Governing Council, took a light-hearted jab at
colleagues who might be considered dovish.

“My ornithological knowledge is insufficient,” he said. “But as far
as I know, doves can be very cruel: sometimes they peck at their young.
Among the hawks, the sense of family is much more developed.”

–Paris newsroom, +331-42-71-55-40; bwolfson@marketnews.com

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