January 2, 2015 / 10:24 AM / in 3 years

Merkel ally urges ECB not to buy struggling states' bonds

BERLIN (Reuters) - A senior member of Angela Merkel’s party warned the European Central Bank not to pour money into Greece and other struggling euro zone states through bond purchases, saying this would reduce pressure on them to enact much-needed reforms.

General view of the headquarters of the European Central Bank (ECB) in Frankfurt October 26, 2014. REUTERS/Ralph Orlowski

Michael Fuchs, deputy parliamentary floor leader of the German chancellor’s Christian Democrats (CDU), told Deutschlandfunk radio on Friday: ”We shouldn’t pump extra money into these states, but rather make sure they continue along the reform path.

“I’d be grateful if (ECB President Mario) Mr Draghi would make statements along these lines.”

In an interview with German financial daily Handelsblatt published on Friday, Draghi urged politicians to implement necessary reforms, reduce tax burdens and cut red tape to support a fragile euro zone recovery.

He also said the risk of the central bank not fulfilling its price stability mandate was higher now than half a year ago, and reiterated its readiness to act soon if needed, with government bond purchases among the tools it could use.

With the euro zone flirting with deflation, financial markets interpreted Draghi’s comments on Friday as strongly suggesting the ECB would soon embark on outright money-printing, and the euro sank to a 4-1/2 year low against the dollar.

Printing money to buy government bonds, a measure known as quantitative easing (QE), is seen as one of the last tools the ECB has to revive inflation. The bank has already pushed its key interest rate down to a record low of 0.05 percent and doubts are growing about the impact of earlier measures.

“I expect there to be fierce discussion over this at the next ECB meeting,” said Fuchs, referring to opposition to the bond-buying plan by the head of the Bundesbank Jens Weidmann. The ECB’s next policy meeting is on Jan. 22.

Fuchs has frequently expressed frustration felt by many German politicians and the public about the pace of reform in twice-bailed-out Greece.

He was quoted as saying in a newspaper interview published on Wednesday that euro zone politicians were not obliged to rescue Greece as the country was no longer of systemic importance to the single currency bloc.

Greece holds a general election just three days after the ECB meeting and polls suggest the left-wing Syriza party, which rejects the terms of Greece’s euro zone bailouts, will emerge as the strongest party.

Reporting by Alexandra Hudson; Editing by Noah Barkin and John Stonestreet

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