It hasn’t taken very long.  At only his second ECB press conference the new President Mario Draghi firmly sided with the Bundesbank on the important matter of opposing Quantitative Easing; he also made it very clear that he would obey the spirit of this policy by ruling out finding a legal ’trick’ to side-step the rules banning the ECB from printing money to buy sovereign bonds.

Draghi also took the opportunity to explain more clearly what he meant by fiscal compact, i.e. an agreement amongst the euro-17 comprised of three pillars: Firstly national economic policy geared towards fiscal stability, economic competitiveness and growth leading to job creation. Secondly fiscal rules enshrined in treaties amongst the euro-17 which constrain national budget deficits and debt-to-GDP ratios – these rules are supposed to prevent euro-17 countries from even passing budgets which do not comply with these SGP rules in the first place.  The third pillar is the EFSF/ESM providing a stabilisation role by lending to euro-17 countries which cannot borrow at reasonable rates from the bond markets. 

The ECB wants the spirit of the “no monetary financing” rules obeyed, i.e the ECB is not an IMF member and therefore it cannot lend to the IMF and furthermore the ECB takes a very dim view of euro-17 central banks lending to the IMF which then recycles this cash by lending it to selected euro-17 governments.  The ECB will strictly obey Article 123 of the EU Treaty which forbids it from buying bonds directly from euro-17 governments.  Draghi went out of his way to state that this prohibition on monetary financing of governments was in the best tradition of the Bundesbank.  Therefore the only way to force the ECB to engage in Quantitative Easing is to change its mandate by changing the Treaty – and this is something Germany would never allow because of its history of hyper-inflation during the Weimar period.

Draghi stated clearly that the SMP is neither eternal nor infinite and he clearly wants the EFSF/ESM up & running as quickly as possible so as to be able to hand over this “bond-buying stabilisation” role to them.  He confirmed that the ECB will act as the EFSF’s agent by intervening in sovereign debt markets on the EFSF’s behalf and for their account.

Finally Draghi clarified that the “additional measures” which he said would follow strengthened fiscal rules amongst the euro-17 did not refer to vastly increased bond buying via the SMP – the “superwaffe / bazooka” which every observer thought he was referring to.

A few weeks in Frankfurt is all it has taken for Draghi to become an honorary Bundesbanker.  The euro-zone governments will have to regain the confidence of the bond markets without the ECB providing a backstop.  The IMF is going to have to be quick in getting its non-EU members to lend it more money because the IMF’s current $390 bln lending capacity (plus the extra €200 bln the EU members promised it yesterday) is not going to be enough to bail out Italy.  Recall a recent rumour in the Italian press about a €600 bln IMF package for Italy being prepared – and rumours in the Italian press have a history of being true.  The IMF also needs to get other countries (BRICS ?) to pony up some cash so as to make it look like there is a broad spread of countries increasing its lending capacity and not just Europe alone recycling national central bank money to Italy via the IMF (the ECB has made it clear it would veto this as de facto monetary financing of governments).