Not for the first time, the public element of the ECB’s debate over the next phase of its long campaign to stabilise the fragile euro zone economy is being played out largely in German media. This reflects acute sensitivity in the country over central bank interventions to prop up the weakest members of the single currency.
Mario Draghi’s warning in business paper Handelsblatt on Friday about the threat of deflation delivered only an implicit nod in favour of quantitative easing (QE), or large-scale purchases of sovereign bonds by the ECB. Still, they were sufficient to send the euro to the lowest level against the dollar for more than four years.
If all of that suggests the market believes ECB action is increasingly likely when the bank's governing council meets on January 22nd, the battle is not yet done. Draghi's remarks came as fresh doubts about QE were raised by Michael Fuchs, depuy parliamentary leader of the Christian Democrat party of chancellor Angela Merkel. He told Deutschlandfunk radio that the ECB should not "pump money" into weak countries as that ease pressure for difficult economic reforms. "I'd be grateful if Mr Draghi would make statements along these lines," said Fuchs.
Bundesbank reservations
So the argument continues. The reservations of Bundesbank chief Jens Weidmann in respect of QE are clear. Never a man to rush the central banking fences, he now favours waiting to see whether the declining price of oil delivers stimulus to the wider economy. This is at odds with the Draghi narrative, centred as it is on deflation risk. A big dip in oil prices will always bring inflation down.
German finance minister Wolfgang Schäuble rowed in behind Weidmann over Christmas, saying "cheap money" should not sap willingness to execute reforms. Interviewed by Bild last Sunday, he said Weidmann's arguments were strong and are heard in the ECB. Asked, however, whether the Bundesbank chief had sufficient clout, Schäuble said Germany's voice has weight in the ECB. "But even if we're the strongest economy, Germany can't always get its way. At the end of the day a compromise is what's needed."
At this point in the discussion, however, the ECB appears far from compromise. Weidmann was the lone voice on the ECB council against the outright monetary transactions bond-buying initiative which becalmed the debt crisis in 2012, but it would be better for Draghi if he could point to unanimity in the ECB if it goes down the road to QE.
Thus the bank begins 2015 as it spent 2014, beset by internal divisions over QE. All of this comes amid renewed uncertainty over the fate of Greece, whose general election this month takes place days after the decisive ECB meeting. The stakes, yet again, are rising.
