Bank on 'Super Mario' to give Europe a monetary jolt

Sun Dec 7, 2014 4:14am EST
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By Paul Taylor

FRANKFURT (Reuters) - From his office on the 41st floor of the gleaming new European Central Bank headquarters, Mario Draghi's view stretches far beyond Frankfurt's high-rise financial center and he doesn't like what he sees.

The darkening outlook for the euro zone's flat and nearly inflation-less economy, exacerbated by tumbling oil prices, is driving him inexorably towards radical action.

Bank on the ECB president to fight the risk of deflation with an expanded program of asset buying early next year, probably in March, despite deep misgivings in Germany's Bundesbank and from German public opinion.

Draghi has worked for months to build support for what would be the biggest leap in the 15-year-old bank's history -- printing money to buy euro zone sovereign bonds on a large scale, so-called quantitative easing or QE.

Germans are historically allergic to such a policy, which some fear could trigger 1920s-style hyperinflation, create asset price bubbles and give euro zone laggards an excuse to avoid painful economic reforms. Many believe it amounts to illegal financing of governments through the back door.

Draghi confronted such concerns head-on last week, saying that to allow inflation to remain far below the ECB's target of almost 2 percent would breach its mandate.

"Not to pursue our mandate would be illegal," he said, turning the legal argument on his German critics.

The bank has just lowered its inflation forecast for next year to 0.7 percent and that did not take account of the latest fall in oil prices.   Continued...

European Central Bank (ECB) President Mario Draghi addresses an ECB news conference December 4, 2014, for the first time in the ECB's new 1.3 billion euro headquarters in Frankfurt. Draghi said on Thursday the bank would reassess the impact of its monetary policy stimulus early next year and take further action if necessary.                REUTERS/Kai Pfaffenbach