ECB, Germany remain split over fresh stimulus

A BITTER row has erupted between the European Central Bank and Germany over a stimulus program to save the eurozone from a deflationary crisis.

A BITTER row has erupted between the European Central Bank and Germany over a giant stimulus program to save the eurozone from a deflationary crisis.

On Thursday, ECB president Mario Draghi is expected to launch a quantitative easing program worth up to €600 billion ($845bn). But German and ECB officials remain at loggerheads over basic points of the plan, with the argument expected to continue right up to the meeting of the bank’s governing council on the day.

Last week, it appeared that ECB officials had made a crucial concession to win German support. State central banks would buy bonds issued by their own governments — but would not have to shoulder the risk of losses on bonds bought by other national lenders.

However, ECB officials denied over the weekend that the bank had abandoned the idea that risk should be spread across the 19 members of the currency bloc. “At this stage, everything is very open,” said an ECB insider. The bank views Germany’s position as being at odds with the fundamental principles underpinning the single currency.

Far from having accepted that the risk of default should not be spread across the eurozone, the ECB is thought to be determined to press ahead with it at Thursday’s meeting. “Risk sharing is vital to the success of the QE program,” said Antonio Garcia Pascual, chief euro area economist at Barclays. “Without it, there will be an increased market perception of euro system fragmentation as well as sovereign risk.”

The ECB is under heavy pressure to launch QE: prices in the eurozone fell last month and the bank is anxious to ensure deflation does not become established. Interest rates are already at record lows of near zero per cent. Late last week, ECB board member Benoit Coeure appeared to confirm that QE would definitely go ahead. He said the bank would take the US and British experiences into account in setting the amount of debt to buy.

“We should also decide if the purchase would concern the debt of certain countries or if it should be balanced across the entire eurozone,” he told the French newspaper Liberation. He said that weaker-than-expected growth and inflation “oblige us to react and, once more, to imagine instruments to support growth”.

The ECB hopes that injecting liquidity into the system will increase bank lending, boosting growth across the eurozone. It is expected to begin printing money within a month.

The Sunday Times