(MENAFN- Gulf Times) Greek and Italian finance ministers expressed opposing views on the effectiveness of the European Central Bank's quantitative-easing programme with Greece's Yanis Varoufakis urging an alternative plan to stimulate Europe's economy.
Varoufakis said ECB president Mario Draghi's ‚¬1.1tn ($1.2tn) QE would fail to drive investment-led growth, just as his Italian counterpart, Pier Carlo Padoan, hailed the programme as already being successful through a declining euro. Padoan said a weaker euro is in line with the single currency area's long-term economic outlook and will boost Italy's recovery this year.
While Greece is involved in negotiations with its European Union partners amid concerns the country could run out of cash at any moment, Varoufakis suggested an "alternative" stimulus plan that entails issuing bonds linked to investment projects financed by the European Investment Bank. Both finance ministers spoke on Saturday at the Ambrosetti economic symposium in Cernobbio, Italy, where ECB Governing Council Ignazio Visco also took the floor.
"QE could prove both unsustainable and incapable of boosting private credit growth and investment in productive activities," Varoufakis said. "Imagine an alternative plan to QE where the EIB will take its marching orders to lead an investment-led recovery for Europe. I'd like to call that the Merkel plan."
The ECB sovereign quantitative-easing plan, which started on Monday, entails purchasing ‚¬60bn ($63bn) per month until September 2016, for a total of ‚¬1.1tn. ECB Executive Board member Benoit Coeure said on Thursday that national banks bought ‚¬9.8bn in the plan's first three days.
So far, the ECB's sovereign-debt purchases have pushed bond yields in the euro area to record lows and reinforced the euro's year-long decline. The single currency depreciated 25% against the dollar in the last 12 months.
"The euro is now approaching a long-term level which is more consistent with fundamentals," Padoan said in an interview with Bloomberg TV at the Ambrosetti Forum on Saturday. "A weaker euro, a euro more in line with fundamentals, of course helps exporting firms in Italy."
Analysing the ECB bond-buying programme, Visco said that while QE was justified in the light of the "deflation risk" in the region, its effects on the exchange rate and on the bond market have overshot expectations in the first week of the plan.
"It is beyond doubt that the strength of the exchange rate decline is larger than we had expected," the Bank of Italy Governor said.
QE will lead to 1 percentage-point growth in aggregate demand, Visco said, citing a study by Bank of Italy staff. It will also improve "the context for structural reforms" by reducing macroeconomic uncertainty, he added.
Padoan warned that the favourable economic conditions created by QE and by the weaker euro, as well as by a slump in oil prices, shouldn't be seen as an "incentive" to slacken the pace of reform in debt-laden Italy. The country's economy contracted last year and unemployment rose to record highs. The weaker euro coupled with a slump in oil prices will lead to expansion in the first quarter, he said.
"I would expect positive growth in 2015 but this as far as I can go in terms of numbers," Padoan said. The euro decline "generates additional growth momentum which has to be strengthened by further measures so that investment and jobs begin to get strengthened in the country."
Prime Minister Matteo Renzi, who took office a year ago with plans to pull the economy out of the recession, recently overhauled Italy's labour market to tackle joblessness that has been consistently above 12.5%. The euro area's third- largest economy failed to rebound from its three-and-half-year long slump in the fourth quarter, when gross domestic product was unchanged from the previous three months.
The ECB's bond buying is scheduled to last at least until September 2016, or until inflation is back on track toward the ECB's goal of just below 2%. Prices in the region fell 0.3% in February.
"One of the reasons why QE is showing to be so effective is exactly the announcement of an 18-months duration with possibly open ended further measures," Padoan said. "This initial reaction in terms of interest rates falling, expectations for inflation beginning to rise and a weaker euro will be consolidated if the QE programme will stay where it is."
While Italy called for more budget flexibility to support growth within European Union deficit rules, Padoan has sided with euro-area colleagues in giving a cold shoulder to the Greek government's requests to renegotiate debt or relax the bailout conditions.
As negotiations are under way between Greece and its creditors amid concern that the country could run out of cash at any moment, Padoan said he is "fully confident" that a solution to the crisis will be found and called on Greece to present detailed reform plans.
"When you are in those kind of negotiations you must be very specific about the measures you intend to implement and you have to show that measures are taken to implement them," Padoan said. "Of course, the Greek government has popular support which at some stage may clash with requests from Europe but I am confident that a compromise will be found in the interest of both Europe and Greece."
In Cernobbio, Varoufakis pledged on Friday that Prime Minister Alexis Tsipras' Syriza party would suspend some of its election promises to reach an agreement with EU partners. Still, he refrained from giving specifics on his country's moves in the coming weeks, preferring to focus on the shortcomings of the ECB's stimulus and the risks of imposing renewed austerity on Greece.
"At the risk of sounding like a party-pooper, I find it hard to imagine how the broadening of the monetary base in a fragmented and fragmenting monetary union will transform itself into a substantial increase in private investment in productive activity," he said on Saturday. "The risk is a toxic democratic deficit from which only populists, nationalists, federalists, and indeed in my country, Nazis profit from."
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