The European Central Bank (ECB) will face a crucial test of its determination to do “whatever it takes” to preserve the euro. This week announced the purchase of debentures to fight deflation affecting the economies of the countries of the European Union (EU).
The advisor to the highest court of the EU and the National Bank Swiss have paved the way for quantitative easing, or printing money, but stiff opposition from the Central Bank of Germany, politicians and the public of this country could handcuff the ECB.
It is no longer disputed the purchase of government bonds by the ECB, but how the program will be designed and whether it will be seen as credible and sufficient to solve problems. The risk is that the institution, which has remained cohesive area of the single currency over five years of debt crisis, adopt a relief plan to send the wrong signal to the markets, fails its purpose and endanger their credibility.
The news that the ECB president, Mario Draghi, met privately with German Chancellor Angela Merkel last week highlights the enormous political sensitivity of the decision. While the German Central Bank opposes the policy because it looks like a backdoor to finance irresponsible governments, creating potential liabilities for German taxpayers, the ECB hopes that Merkel did not censure and contains its allies conservatives.
Some who support the quantitative easing fear that Draghi made too many concessions to the Germans in framing a program that is limited in volume, which does not share intra-border risks and excludes the purchase of bonds countries with low credit ratings. A draft plan circulated this month between technical ECB limits purchases to 500,000 million euros. Some market analysts argue that to achieve its objective, the program would have to double that size or be unlimited
Draghi has a majority in the Governing Council defines monetary policy, but the two German members. – the head of the Central Bank, Jens Weidmann, and the representative of the Executive Board of the ECB, Sabine Lautenschlaeger- probably vote against the plan of care. A handful of other governors could join them
The veteran economist Danish Niels Thygesen, one of the experts who designed the original draft of the euro in 1980, said:. “If those are the circumstances for a quantitative easing, perhaps not worth even for their biggest fans. “
It would be a limited program designed both lawyers and economists.
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