European Central Bank President Mario Draghi hit back at Germancriticism of his plan to intervene in bond markets and remindedEurope's largest economy of its responsibility to anchor theeuro.

The ECB “will always act within the limits of its mandate,”Draghi wrote in a commentary for German newspaper Die Zeit providedby the Frankfurt-based ECB today. “Yet it should be understood thatfulfilling our mandate sometimes requires us to go beyond standardmonetary policy tools.”

Bundesbank President Jens Weidmann and some German politicianshave lashed out at Draghi's plan to resume government bondpurchases to lower borrowing costs in countries such as Italy andSpain. Draghi's riposte comes as Chancellor Angela Merkel, who hassignaled broad support for ECB bond buying, hosts Italian PrimeMinister Mario Monti in Berlin today.

“The ECB is not a political institution,” Draghi wrote. “But itis committed to its responsibilities as an institution of theEuropean Union. As such, we never lose sight of our mission toguarantee a strong and stable currency. The banknotes that we issuebear the European flag and are a powerful symbol of Europeanidentity.”

Weidmann has said he's against ECB bond purchases because theyrisk increasing governments' reliance on the central bank and won'tsolve Europe's debt crisis. “Such policy is too close to statefinancing via the money press for me,” he told German magazine DerSpiegel in an interview published on Aug. 26.

Draghi's plan aims to win governments time to implement fiscalreforms while also ensuring that any assistance is tied toconditions. It requires distressed governments to request aid fromEurope's bailout fund and sign up to a memorandum of understandingbefore the ECB would act to reduce bond yields in the secondarymarket if necessary. Draghi is due to present details of the newprogram after a policy meeting on Sept. 6.

Italy doesn't need to tap the rescue fund at the moment becausemeasures by the government are starting to offset market concerns,Monti said in an interview with Il Sole 24 Ore published today.

The country sold 9 billion euros ($11.3 billion) of Treasurybills at the lowest rate since March today. Yesterday, it priced azero-coupon 2014 bond to yield 3.064 percent, down almost 2percentage points from the last sale a month ago.

Systemic Risk

Members of Merkel's Christian Democratic Union and its FreeDemocratic Party coalition partner said the ECB could become a riskto the financial system if it sticks to plans to resume bondpurchases, Handelsblatt reported today. The ECB's attempts tochange the foundations of the euro are illegal, Frank Schaeffler,the FDP's parliamentary finance spokesman, told the newspaper.

“The root of Germany's success is its deep integration into theEuropean and world economies,” Draghi wrote. “To continue toprosper, Germany needs to remain an anchor of a strong currency, atthe center of a zone of monetary stability and in a dynamic andcompetitive euro-area economy.”

Only a stronger economic and monetary union can provide this,Draghi said.

“Draghi seems to suggest here that his critics are somehowanti-European,” said Christian Schulz, senior economist atBerenberg Bank in London. “There has been a lot of deliberatemisleading by politicians in Germany about what the ECB is doingand also about what the future of the euro is.”

European leaders are working on a revamp of the euro'sinstitutional landscape in an attempt to form a fiscal and bankingunion to complement the economic and monetary union.

“Those who want to go back to the past misunderstand thesignificance of the euro,” Draghi wrote. “Those who claim only afull federation can be sustainable set the bar too high. What weneed is a gradual and structured effort to complete EMU. This wouldfinally give the euro the stable foundations it deserves.”

Draghi said the ultimate goals that the euro was founded on werestability, prosperity and peace. “We know this is what the peoplein Europe, and in Germany, aspire to.”

Bloomberg News

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