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January 18, 2015 • 12:12
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The European Central Bank faces a crucial test of its determination to do” whatever it takes “to preserve the euro when taking a decision this week about buying sovereign debt to combat deflation and revive the economy. In the picture is the president of the European Central Bank, Mario Draghi, during a press conference on December 4, 2014 at the new headquarters of the monetary institution . in Frankfurt
Photo: Kai Pfaffenbach / Reuters
The European Central Bank faces a crucial test of its determination to “whatever it takes” to preserve the euro when taking a decision this week on buying sovereign debt to combat deflation and revive the economy.
The advisory by the highest court of the European Union and the SNB have paved the way for quantitative or relief printing money, but stiff opposition from the central bank of Germany, politicians and public opinion in that country could handcuff the ECB.
Ya not buying sovereign bonds is discussed by the bank, which has been widely anticipated, but how the program will be designed and whether it will be seen as credible and sufficient.
The risk is that the institution has maintained cohesive area of the single currency over five years of debt crisis adopt a relief plan to send the wrong signal to the markets, breaches its objective and jeopardize its credibility.
news that ECB President Mario Draghi, met privately with German Chancellor Angela Merkel last week highlighted the enormous political sensitivity of the decision.
While the Bundesbank opposes this new monetary policy that considers it as a backdoor to finance irresponsible governments, creating potential costs should be borne by German taxpayers, the ECB hopes that Merkel did not censure and contain their conservative allies.
Some who support the quantitative easing fear that Draghi made too many concessions to the Germans if you design a program that is limited in size and dimension, no shares intra-border risks and excludes the purchase of bonds from countries with low credit ratings.
A draft plan circulated this month between technical ECB limits purchases to 500,000 million euros. Some market analysts say that to achieve its objective, the program would have to double that size or be unlimited
Draghi has a majority in the council of government that defines monetary policy, but the two German members. – Bundesbank President Jens Weidmann, and executive committee member of the ECB Sabine Lautenschlaeger- probably vote against the policy of quantitative easing. Another group of governors could join them.
According to sources the ECB, an option that is considered seriously is to make each of the national central banks of the Eurosystem 19 nations sharing the risk of cessation of payment in all or most bonds in their own countries that are purchased.
“This would, at best inefficient and at worst dangerous,” said Guntram Wolff, director Bruegel economic institute in Brussels. “It would be a strong signal that the ECB remains a ‘united and diverse’ institution,” he said.
The veteran Danish economist Niels Thygesen, one of the experts who designed the original draft of the euro in 1980, told Reuters: “If those are the circumstances for a QE, perhaps not worth even to his greatest enthusiasts”
It would be a limited program designed both lawyers like. economists.
GREEN LIGHT LEGAL
However, declaring legal to buy bonds the ECB and to urge the courts to be cautious to challenge the central bank when they lack experience, Advocate General at the European Court effectively gave the green light to the measure last week.
Although their opinion was referring to a lawsuit filed by German Eurosceptics against an earlier version and have not used the purchase scheme bonds, had a clear reading that related to the policy of quantitative easing.
In particular, he argued that announce early limits of bond purchases would undermine its effectiveness, it should not prioritize the ECB on private creditors if debt restructuring and that there is no impediment to buy bonds from countries with low credit ratings.
That should give Draghi freedom to buy bonds of all eurozone states in proportion to their weight in the Eurosystem for the time necessary to bring inflation back towards the target of just below 2 percent, from the current near zero.
The euro has fallen from almost 1 40 per US dollar in May 2015 to 1.15 last Friday and the decline has gained momentum as they grow expectations that the ECB launches its quantitative easing program.
The Swiss central bank last week off the brake it had imposed on the fall of the euro, to abruptly abandon a three-year limit on the exchange rate of the Swiss franc.
The measure, which shook global markets and caused huge losses for some banks and securities firms, showed how difficult it is for central banks to contain the volatility of markets and how easy it many years of credibility may be jeopardized
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