Although France and Germany are still wrangling over the part that the European Central Bank should play in resolving the spreading debt crisis across the eurozone, apparently one thing is believed possible despite their disagreements: that the ECB could start printing money.
A Reuters poll put the odds of such a quantitative easing action at a median 48%, among European and U.S. bond strategists, despite Germany’s opposition to anything that might spur inflation.
A Bloomberg report on Friday said that French President Nicolas Sarkozy had backed down on his stance that the ECB should provide such a backstop against eurozone borrowing, acknowledging German fears of a return of the inflation the nation experienced between the two World Wars. However, a Reuters poll conducted this week among 50 bond strategists found nearly even odds that the ECB would resort to QE in order to quell contagion.
Most of those who said they believe QE will occur pegged the start date to occur by March of 2012. A small majority of those polled, 25 out of 49, said they believe that the ECB’s role will escalate into lender of last resort and provider of loans to troubled governments.
ECB chief Mario Draghi was critical Friday of governments’ efforts to ward off contagion through reform policies, saying in the report, “Where is the implementation of these long-standing decisions? We should not be waiting any longer.”
Draghi also warned of a huge social and economic impact should the credibility of the ECB be called into question. He said the bank was contributing to economic stability while maintaining its independence—something that could be at risk if it moves into QE, which would be a substantial departure from its normal policy.
So much more prominent a presence in resolving the debt crisis could also leave the central bank vulnerable to political intervention, and endanger its price stability mandate. It could also drive up inflation, which at 3% already tops the eurozone target of 2%.
And that is something Germany is very much afraid of because of its between-the-wars experiences. It continues to insist that QE must not happen. Michael Fuchs, the economy spokesman for Merkel’s Christian Democratic Union party, was quoted saying, “Printing money at the end of the day means inflation. Every German is very much scared about inflation.”
His is not the only voice raised against QE. On Friday the Financial Times ran an op-ed piece by German Foreign Minister Guido Westerwelle that called such a possibility a "momentous mistake" and said in part, "In the end we would end up with a depreciated currency and an even more destabilized eurozone. The ECB's independence and firm commitment to price stability are of paramount importance to Europe's economy."