The European Central Bank faces a crucial test of its resolve to do “whatever it takes” to preserve the euro when it decides this week on buying government bonds to combat deflation and revive the economy.
The EU top court’s adviser and the Swiss National Bank have smoothed the way for quantitative easing (QE), or printing money, but fierce opposition from Germany’s central bank, politicians and public may yet shackle the ECB.
At issue is no longer whether the bank buys sovereign bonds, which has been widely flagged, but how the programme is designed and whether it is seen as credible and sufficient.
The risk is that the institution that has held the single currency area together through five years of debt crisis adopts a “QE-lite” plan that sends the wrong signal to markets, misses its target and jeopardises the bank’s credibility.
News that ECB President Mario Draghi met German Chancellor Angela Merkel privately last week highlights the acute political sensitivity of the decision.
While the Bundesbank is opposed to the policy, which it sees as a back door to monetary financing of feckless governments, creating potential liabilities for German taxpayers, the ECB is hoping Merkel won’t denounce it and will restrain her conservative allies.
Some QE supporters fear Draghi may make too many concessions to Germany by framing a programme that is limited in volume and scope, doesn’t share risk across borders and excludes buying bonds of countries with the lowest credit ratings.
A draft plan circulated by ECB staff this month would cap purchases at 500bn euros.
Some market analysts say it may need to be twice that size or open-ended to reach its objective.
Draghi has a majority on the ECB’s policy-making council but the two German members seem sure to vote against QE.