(Michael Probst ~ Associated Press)
Germany's national bank may have lost one round. But the contest is not over, analysts say.
The ECB chief laid out a plan Thursday under which the central bank could again start buying government bonds of indebted countries such as Spain and Italy -- as long as the governments first approach the bailout funds set up by the 17 countries that use the euro. The purchase program would help drive bond yields, or interest rates, down. But, Germany is opposed to the ECB buying bonds and has been traditionally cautious about stimulating the economy for fear of creating inflation.
The eurozone is struggling as economies across the region face deepening recessions. Spain and Italy, the two chief trouble spots, are threatened with a financial collapse that could tear the 13-year old currency union apart and rock the global economy.
Spain's bond borrowing costs, or yields, have hit record highs recently as it tries to prop up its stricken banking sector and meet requests for financial aid from its regional governments. That has raised fears the country may be the next to seek a bailout from the other eurozone countries, following Ireland, Greece, Portugal and Cyprus. Italy, attempting to keep a handle on its debts in a stagnant economy, is also feeling the heat.
It was against this background that Draghi told business leaders in London 10 days ago that the ECB would do "whatever it takes" to save the 17-country euro. Then, on Thursday, he pushed through his new bond-purchase proposal at the bank's meeting at its headquarters in Frankfurt.
The ECB head went out of his way to mention that there was one dissenting voice on the council: the German national bank the Bundesbank and its head Jens Weidmann. Draghi conceded "that it's clear and it's known that Mr. Weidmann and the Bundesbank ... have their reservations about programs that envisage buying bonds."
The Bundesbank is clearly outvoted -- but its opposition to more aggressive rescues of indebted countries still has strong support at home in Germany and in other better-off countries such as Finland and the Netherlands. This could remain an obstacle to Draghi and the board majority.
Draghi showed he had won a consensus for more action, relying on central bank heads from other countries -- including the indebted ones. But trying to fix Europe's crisis without Germany's central bank will be tough. That's because it represents the largest economy in the eurozone -- and because its insistence on monetary and fiscal discipline reflects the feelings of the German people -- and some richer European countries -- who are reluctant to pay to solve other people's mistakes.
"It's a tricky one," said Gabriel Stein, chief executive of the Official Monetary and Financial Institutions Forum, a London-based think tank. "Technically they can do it without support from the Bundesbank, they can vote and decide to do this."
"But that always raises a question mark, because the German economy is the biggest and most important in the euro area, and ultimately any payment comes from the Germans. And the second thing is, continued German resistance may ultimately spread to some of the other creditor countries."
A Bundesbank spokesman declined to comment on the ECB decision. The bank has made its reasoning clear, however, in numerous speeches by Weidmann. Lowering bond yields collides with the European Union treaty, which forbids the ECB from using its monetary powers to finance governments. The Bundesbank has also warned that central bank assistance simply relieves any pressure on politicians to cut spending and reduce the deficits that got them into debt trouble in the first place.
As the biggest ECB member, Germany also has the biggest exposure to any losses the bank takes on bond purchases.
In the past, two Germans left the ECB council rather than go along with bond purchases -- former Bundesbank head Axel Weber and executive committee member Juergen Stark.
Erik Nielsen, chief economist at Unicredit, said Draghi tried to win Bundesbank approval by adding stringent conditions: Governments would have to apply to the bailout fund for help and agree to cut their deficits and take other steps to improve their finances. "So, without the Bundesbank on board, Draghi needed to put so many conditions in front of the potential use of the [bond buying program] that the German general public, political leaders and media would broadly accept it."
While the Bundesbank held out, the addition of conditions appears to have won the approval of the Netherlands, Finland and Joerg Asmussen, the other German representative on the governing council and a former German finance ministry official.
Draghi's decision to add strict guidelines could have been made to avoid a repeat of the ECB's previous foray into bond-buying. That effort began in May 2010 under Draghi's predecessor, Jean-Claude Trichet, and it bought some (euro) 210 billion in bonds. It was stopped in March after it failed to decisively lower yields.
The Trichet program didn't work in large part because the Bundesbank objected loudly at the time, saying the purchases blurred the line between monetary policy and bailing out governments. The criticism led markets to think the ECB wasn't solidly behind the program.
Joerg Kraemer, chief economist at Commerzbank, warned that Draghi's latest conditions likely won't be enough to win over the Bundesbank.
Objections from the German national bank would not make bond purchases ineffective, he said, but the program could fail if rescued governments pedal back on their attempts to fix their problems.
"In the short run I think the ECB will continue to ignore the Bundesbank. In the long run they cannot afford to because the Bundesbank has huge influence on the German public, it's their biggest shareholder and they cannot ignore it if the German public does not support the ECB."