German Chancellor Angela Merkel will not have a vote when the European Central Bank’s governing council meets on Thursday to decide whether to launch an unprecedented program to buy hundreds of billions of euros in euro-zone government debt.
But the head of Europe’s largest economy still holds tremendous weight. So much so that the ECB’s president, Mario Draghi, travelled to the Chancellery in Berlin last week to present his latest controversial ideas for how to save the 19-country euro zone from economic stagnation.
It seems a foregone conclusion that the Frankfurt-based ECB will formally announce its quantitative easing program on Thursday, a U.S.-style monetary policy step designed to lower long-term interest rates and prevent the euro zone from falling further into deflation, but which has never before been carried out in the euro currency bloc.
Central banking sources said the first purchases of government bonds could come within 14 days. Financial markets have also widely priced in the move, and economists estimate the ECB will aim to buy as much as €700 billion in total over the coming years. The purchases would be spread across all of the euro zone’s 19 member states.
“Were every central bank to buy only the government debt of their own country, this would minimize the danger of an undesired redistribution of risks,”
The measure has long been floated by Mr. Draghi and other central bankers in the euro currency zone. A public relations campaign has been underway to convince a skeptical German public since the end of December: Members of the European Central Bank’s governing council have given nine interviews to German media publications, including three to Handelsblatt.
Germany’s own central bank, the Bundesbank, has long been openly critical of the ECB’s plans and is likely to vote “no” on Thursday. It has argued the threat of a prolonged period of deflation in the euro zone is not real and fears the plans come too close to financing government spending, something that is illegal under the ECB’s founding charter. Equally skeptical is the country’s finance minister, Wolfgang Schäuble, while numerous other politicians and business groups have also criticized the plans.
For the ECB and Mr. Draghi, who argue the policy is necessary on strictly monetary policy grounds and received backing last week from the European Court of Justice, it is Ms. Merkel’s voice that now counts the most.
Mr. Draghi may have gained a partial victory. Government sources said Ms. Merkel has agreed not to criticize the program publicly, a move that could further fan the flames of dissent in a country already highly skeptical of the policies of Mr. Draghi, an Italian-born economist who has led the Frankfurt-based ECB since 2011.
In her first public comments on this issue, Ms. Merkel on Monday said only that the ECB would be making its decision “independently” of governments. She played down the overall significance of this week, which will also see Greek voters go the polls to elect a new parliament.
“I would not class this as a week of destiny for the euro,” Ms. Merkel said in Berlin.
But Ms. Merkel’s silence may have come at a heavy cost.
Sources say Mr. Draghi offered to modify the ECB’s bond-buying program so that that the euro zone’s national central banks are only liable for the bonds of their own country. In other words, if all goes wrong, the German taxpayer wouldn’t have to stand in for, say, Italian debt.
This would mark a first for the ECB, an erosion of the single monetary policy principle that the continent has been striving for since the euro came into existence more than 15 years ago.
Whether Mr. Draghi is really prepared to go down this route remains unclear. The details of the quantitative easing program have yet to be finalized, according to central banking source. The ECB president also made clear to Ms. Merkel that the launch, the timing and the design of any quantitative easing will be dictated by the ECB, which like most major central banks is an independent institution.
“Such an option would mean the end of a unified monetary policy for the euro zone and put in question the credibility of a common monetary policy.”
The idea of “renationalizing” risks in the common currency zone is opposed by central bankers from southern European countries, which continue to struggle economically and have the most to gain from any quantitative easing program launched by the ECB. Economists also fear it will undermine the effectiveness of the program.
“Such an option would mean the end of a unified monetary policy for the euro zone and put to question the credibility of a common monetary policy,” warned Marcel Fratzscher, head of the left-leaning Berlin-based economics institute DIW. It would “reduce the chances of success of any bond buying program.”
Mr. Draghi himself is also reportedly skeptical. And yet, it may be a compromise he needs to reach a broad consensus. The idea may have placated some of the more hawkish central bankers in Europe’s northern countries who may have otherwise voted against quantitative easing on Thursday.
“Were every central bank to buy only the government debt of their own country, this would minimize the danger of an undesired redistribution of risks,” Klaas Knot, the head of the Dutch central bank, told German magazine Spiegel last week.
Other details of the program also seem to have been decided in favor of the hawks.
The option of buying debt according to the size of each country’s outstanding debt markets has been laid aside, according to central banking sources. This would have benefited Italy, which has more debt outstanding than any other country in the euro zone.
Instead, government debt will be bought according to the ECB’s capital key, essentially according to the size of each economy. This means that every fourth bond bought by the ECB will come from Germany.
In addition, the amount of debt the ECB can buy from any individual country will be capped at between 20 and 25 percent of the total outstanding debt on the market, an idea floated by Bank of France Governor Christian Noyer in an interview with Handelsblatt earlier this month.
The only big question remaining is who will be liable for buying the government debt – the ECB as a whole or the euro zone countries themselves?
Dr. Jens Münchrath, based in Düsseldorf, heads Handelsblatt’s coverage of economics and monetary policy. Jan Hildebrand leads Handelsblatt’s financial policy coverage from Berlin, for which he has won several journalism prizes already. Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin, covering the financial sector. To contact the authors: firstname.lastname@example.org; email@example.com; firstname.lastname@example.org.
This story was updated at 15:30 CET with Ms. Merkel’s comments.