FRANKFURT: Global investors were anxiously awaiting the European Central Bank’s (ECB) first policy meeting of the year Thursday, expecting it to announce a massive bond-buying program to stimulate the struggling eurozone.
Speculation has reached fever pitch that ECB president Mario Draghi will use his most powerful policy tool yet in the battle against deflation in the euro area although analysts have warned that high hopes could be dashed.
The expected program of sovereign bond purchases, known as quantitative easing (QE), comes after eurozone inflation turned negative in December, stoking fears that the region is on the brink of a dangerous spiral of falling prices.
Draghi and his colleagues on the ECB’s executive board have been busy priming the markets for action ever since.
But the scheme, already used by other central banks to stimulate their sluggish economies, has fierce critics, not least in Germany. And any resulting compromises regarding the final size and constitution of such a program could disappoint the markets, ECB watchers said.
Following rate cuts and a range of unprecedented measures to pump liquidity into the financial system, QE is seen as the ultimate weapon in the ECB’s arsenal.
However, the German central bank or Bundesbank believes QE takes the ECB outside its remit and is effectively a license to print money to get governments out of debt.
Economists are also divided as to whether quantitative easing can really work in a single currency bloc made up of 19 economies in very different states of health.
Passing the buck
Former Bundesbank chief Axel Weber, speaking at the World Economic Forum in the Swiss ski resort of Davos, argued that European governments had squandered three years of opportunity to carry out badly needed economic reforms.
“The ECB can only be part of a fix in Europe. In my view they shouldn’t go too far because the more they do, there is the incentive for governments to do less.
“And the problem is if you continue to buy time and the time is not used for reforms, you have to ask yourself if more of the same is the best recipe,” he said.
Another German, the ECB’s own former chief economist, Juergen Stark—who, like Weber stepped down in 2011 because he disagreed with the turn the central bank’s policy decisions had taken—said fears about deflation were “completely exaggerated” and were being invoked merely to push through QE.
German Chancellor Angela Merkel said Wednesday that while the ECB had to be independent in its monetary policy decisions, she was concerned that the wrong signals could be sent regarding the necessity of economic reforms.