The European Central Bank's buying of Italian and Spanish state bonds can only be a temporary measure and must be linked to long-term economic reforms, a leading economist said on Saturday. In an interview in Italian daily Il Sole 24 Ore, Pier Carlo Padoan, chief economist of the Paris-based Organisation for Economic Co-operation and Development, was asked if the ECB's bond-buying can calm financial markets.
"The ECB is intervening heavily on the market for bonds for some countries. But it is clear it is a temporary measure: there is a need to link short-term measures with a strategy for the longer period," said Padoan, who is Italian. He spoke as Italy's parliament prepares to make changes to a tough austerity plan presented by the cabinet in mid-August, aimed at balancing the budget by 2013.
The plan was drawn up at the insistence of the ECB, which demanded an acceleration of fiscal consolidation in return for buying Italy's bonds to bring down yields which had become unsustainably high due to a market sell-off. The ECB reactivated its bond buying purchases this month. In the first two weeks it bought 36 billion euros of bonds bringing down yields on Italian and Spanish bonds to 5 percent, from well above 6 percent before it stepped in.
In the interview, conducted at Jackson Hole in the United States, Padoan said the US Federal Reserve's two rounds of quantitative easing had first dealt with a crisis emergency and then helped the recovery. However the impact of QE on growth has become weaker. "There is liquidity already, also in other economies. Companies have it but no one wants to take on the risk of investing," he said. Fiscal policy has to become more credible and countries have to increase the support for short-term demand, he said.
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