Draghi’s Will Versus Germany’s Shackles

January 19, 2015 Share Print 0

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 program 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 jeopardizes 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.

via CNBC

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Alfonso Esparza

Senior Currency Analyst at Market Pulse

Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.