ECB official warns about downside of QE

Frankfurt - European Central Bank executive board member Yves Mersch warned on Monday about the negative side effects were the central bank to start buying up government debt, urging political leaders instead to reform their economies to boost growth.

"Easing of monetary policy cannot work effectively when the European economy is structurally not in good shape," Mersch said in a speech at an annual banking conference in Frankfurt.

"I would feel a lot better if those politically responsible clearly committed to lowering the risk for the ECB," he said, referring to commitments for lower sovereign debt, closer fiscal and economic integration and structural reforms.

Over the last couple of months, the ECB has launched several measures to revive the lacklustre eurozone economy. Mersch said the bank should let these steps take effect first before considering more action.

If more action was needed, the ECB's hands wouldn't be tied as it could theoretically purchase government bonds or other assets such as gold, shares, or exchange traded funds (ETFs).

But he said the bank was not determined to buy up assets come what may and should consider its actions carefully.

"All possible options should be analysed for their costs and their benefits, as well as checked for efficiency and legal feasibility," Mersch said.

While large-scale purchases of government debt may have played a relevant role for the US Federal Reserve, Mersch said the eurozone's situation was different as it relied a lot more on bank financing than the United States.

He also questioned the impact that such purchases, known as quantitative easing (QE), had in Japan, referring to its unexpected slip into recession in the third quarter.

A central bank that began buying government debt risked being dominated by fiscal pressures, Mersch said, while rising debt levels may make it hard for the bank to control inflation.

He also referred to the legal problem the central bank could run into if it bought euro zone member states' debt, thereby mutualising risk without a common fiscal framework in place.

He conceded that QE could improve financing conditions for banks, but said these were already very favourable.

The ECB is already buying covered bonds and will start buying asset-backed securities (ABS) "in a few days" to help unblock lending to companies and households, Mersch said.

"That in the course of this our balance sheet expands is neither an end in itself nor a fetish," rather a consequence, Mersch said.