The European Central Bank’s public debate over buying government bonds is reaching a climax.
After weeks of argument about quantitative easing in speeches and interviews, officials have just a few days left before a conventional quiet period starts ahead of their Jan. 22 policy meeting. Adding to the intensity, a European court opinion is due that could color any program.
ECB President Mario Draghi’s drive to win over critics of his policies in Germany, the region’s biggest economy, will take him to Berlin for a Jan. 14 conference, a day before QE-opponent Jens Weidmann speaks in the south of the country. They and other officials should then stay out of the limelight before the 25- member Governing Council meets next week in Frankfurt to decide how best to stave off a deflationary spiral in the euro area.
“The issue is about finding a common denominator that most people can agree on,” said Anatoli Annenkov, senior economist at Societe Generale SA in London. “It’s easy to see there is a majority among governors to move ahead. Much less clear is how much risk they are willing to take and how this support translates into practice.”
Draghi’s appearance at an event organized by German newspaper Welt, while currently closed to the media, continues his wooing of a nation concerned he’s taking unwarranted risks and penalizing savers with ultra-low interest rates. Draghi has argued his measures are essential to help the euro-area economy return to health.
On the same day as the conference, the European Court of Justice in Luxembourg will issue an opinion on an earlier bond- purchase program known as Outright Monetary Transactions. The case was referred by Germany’s Constitutional Court after it said OMT, though never used, probably overstepped the ECB’s authority.
The ECJ’s non-binding opinion, which will be followed by a ruling four to six months later, may influence any QE design. The German court said OMT would likely violate European Union rules that forbid the ECB from pursuing economic rather than monetary policy, though it could be legal if limited and placed under certain conditions. Should the ECJ spell out those limits, they could be applied to QE.
The ECB is already considering some of the concerns, with Chief Economist Peter Praet telling Germany’s Boersen-Zeitung last month that options include making national central banks assume the default risk for the debt they buy.
In the meantime, the central bank is pressing ahead. Its staff presented policy makers last week with models for buying as much as 500 billion euros ($591 billion) of investment-grade assets, mostly sovereign bonds, according to a person who attended a meeting of the Governing Council.
The momentum toward QE irks Weidmann, who has argued there is no need for more monetary stimulus as a slump in oil prices provides an economic boost, and that stimulus undermines the incentive for governments to make reforms. He’ll speak in the evening of Jan. 15 in Biberach, Germany, on the outlook for 2015.
His position was echoed over the weekend by the other German member of the ECB’s decision-making body, Executive Board member Sabine Lautenschlaeger, who told Der Spiegel that purchases of government debt should be the “last resort” of monetary policy.
The German position could win support from Klaas Knot, the Dutch central bank governor, and Ardo Hansson, Estonia’s central-bank head. In an interview with Bloomberg News last week, Hansson expressed skepticism over QE, especially given political instability in Greece. Elections there on Jan. 25 could bring a party to power that wants to restructure the nation’s debt.
“I’d personally find announcing a bond-buying program including Greek government bonds in January problematic,” Hansson said. “When there’s a chance that somebody will come and say I’m going to restructure our debt, committing to buy such bonds is near borderline of what could be considered.”
Draghi has signaled he’s willing to seek ways of winning backing for QE, saying in December that consensus can be reached. Even so, he also said unanimity isn’t required and in a rare interview published in German newspaper Handelsblatt on Jan. 2 said “we have to act against” the risk of deflation. Euro-area consumer prices dropped an annual 0.2 percent in December, the first decline in more than five years.
His stance, and comments by Executive Board member Benoit Coeure last month that there is a “broad consensus” for action, signals that the chief sticking points before the Jan. 22 meeting will be on the size and design of a QE package rather than its announcement.
“The matadors will position themselves again this week,” said Holger Sandte, chief European analyst at Nordea Bank AB in Copenhagen. “Draghi will have enough of a majority. Maybe they won’t commit to the amounts the doves would like to see, but then again they can always add on.”