ECB Stimulus

Mario Draghi's Lonely Battle

Draghi ECB
Will euro zone countries support Mario Draghi's plan to buy asset-backed securities or turn on him?
  • Why it matters

    Why it matters

    If governments reject the European Central Bank president’s plan to purchase asset-backed securities, the crisis in the euro zone may linger longer.

  • Facts

    Facts

    • ECB President Draghi wants the central bank to buy up to €500 billion in asset-backed securities to stimulate bank lending and economic growth.
    • Euro zone countries have been reluctant to guarantee asset-backed securities, which would allow the ECB to buy more.
    • Some euro zone countries, including Germany, think the assets are too risky to be held by the ECB.
  • Audio

    Audio

  • Pdf

The European Central Bank has been anything but conventional of late. With the euro zone’s economy stagnating and inflation this week hitting a post-financial crisis low, ECB President Mario Draghi is preparing to take another leap into uncharted territory, and this time without help from governments.

For the first time in its history, the ECB will buy a new set of riskier, private assets from banks in its latest bid to revive lending and economic growth on the struggling continent.

While the decision was taken in September, the details will be fleshed out by Mr. Draghi after the ECB governing council, its top decision-making board, meets on Thursday. Euro zone governments have mostly turned down Mr. Draghi’s invitation to join the program.

The lack of public support could translate into a rare personal setback for Mr. Draghi, whose outspoken leadership has helped dispel doubts about the health of the euro.

ING Bank economist Carsten Brzeski sees Mr. Draghi as a modern-day Sisyphus condemned for eternity to roll a boulder up a hill only to watch it roll back down.

Up until now, the steps taken by the ECB to stimulate growth and bank lending have been largely ineffective.

At stake is the health of the euro zone’s economy and the central bank’s battle to prevent prices in the 18-country bloc from slipping into negative territory, a situation know as  deflation. This goal was dealt another setback on Tuesday after annual inflation in the currency bloc hit a five-year low of just 0.3 percent in September, according to the statistics agency Eurostat. This is far below the ECB’s annual inflation target of 2 percent.

To prevent a further slide, the ECB hopes to buy as much as €500 billion in so-called asset-backed securities, a type of complex, risky debt partly blamed for the 2008 financial crisis that bundles housing mortgages and personal and corporate loans into a single consolidated debt instrument. The market for asset-backed securities largely dried up in Europe after the financial crisis, removing a key source of funding for small businesses. The ECB is hoping to revive that lending.

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