The European Central Bank is set to unveil a programme of mass bond-buying next week to save the euro zone from deflation, but has bowed to German pressure to ensure that its taxpayers are not liable for any losses incurred on other countries' debt.
Policy-makers in Frankfurt are expected to take the momentous decision to embark on quantitative easing (QE) on Thursday, with the most likely option at this stage for the ECB to force the 19 national central banks that make up the euro zone to stand behind their own sovereign bonds.
The decision will come just two weeks after it emerged that euro zone prices had fallen in the year to December for the first time in five years.
Market expectations of euro zone inflation in the longer term are close to record lows.
The move will bring the ECB closer into line with the US Federal Reserve and the Bank of England, which adopted quantitative easing after the global financial crisis.
But ECB officials have reluctantly concluded that introducing full-blown quantitative easing is impossible in the face of implacable opposition from the German political and economic establishment.
Chancellor Angela Merkel remains privately sceptical about ECB bond-buying in principle, fearing it will ease pressure on spendthrift states to introduce tough economic reforms and would amount to fiscal union by the back door.
Neither of the German members of the ECB’s governing council are expected to support the decision to embark on quantitative easing next week.
A compromise over risk-sharing does, however, raise the chances that Mario Draghi, ECB president, will be able to force through a large package of purchases of at least €500 billion worth of government bonds, or announce an open-ended commitment to buy sovereign debt until inflation approaches the ECB's target of just below 2 per cent.
Compromise
Markets would prefer Mr Draghi to compromise on the principle of handing the responsibility for losses to national central banks if that means the ECB could buy more bonds.
"There are a series of trade-offs involved in [designing QE] and whatever is announced will probably not satisfy everyone," said Ken Wattret, economist at BNP Paribas. – Financial Times
