Thorny issues could dog ECB meeting

November 3, 2010
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, FRANKFURT, Nov 3 – A European Central Bank meeting on Thursday could be marked by emerging differences on monetary policy between German leaders and ECB executives that could spell trouble for the eurozone as a whole.

The ECB, German Finance Minister Wolfgang Schaeuble and the German central bank have expressed clear differences on key questions and they could be in the spotlight as the ECB\’s main interest rate stays at 1.0 percent, analysts say.

"In the absence of important news or changes to the ECB’s monetary stance, the Q&A (question and answer) session of Thursday’s press conference will probably be dominated by other topics," ING senior economist Carsten Brzeski said.

They included "the European leaders’ agreement on the reform of European economic governance, the ECB’s bond purchases and the Weber-Trichet face-off," he added in reference to ECB president Jean-Claude Trichet and Bundesbank chief Axel Weber.

Repeated public opposition by Weber to continued ECB purchases of eurozone government bonds — a stimulus measure taken last May to shore up financial markets — earned him a rebuke by Trichet and possibly compromised Weber\’s chances of becoming the next head of the ECB.

Jean-Claude Juncker, head of the Eurogroup of eurozone finance ministers, told the German daily Die Welt he wanted "the ECB to speak with one voice, stick to its decisions and not always try to nuance certain decisions."

Weber says he will speak his mind and "if that\’s going to have implications for my future career, then I\’d be happy to live with those consequences."

Meanwhile, ECB executive board member Lorenzo Bini Smaghi has taken aim at a German push for an "orderly debt restructuring mechanism" for eurozone members, and Trichet has warned it could hurt lending to countries like Greece, Ireland and Portugal.

"It can be easily seen that there can hardly be anything \’orderly\’ in such a process," Bini Smaghi said in the printed copy of a speech delivered Monday in Abu Dhabi.

But German public opinion is fiercely opposed to repeated taxpayer bail-outs of eurozone partners and their creditors, and Schaeuble said Tuesday in Paris the "monetary union was never conceived as a model to enrich speculators."

Germany\’s finance minister used a speech at the Sorbonne university to add: "Private investors and markets must no longer expect a rescue by European taxpayers that encourages indebtedness and irresponsible investments."

His remarks were made available in advance.

Trichet warned European Union leaders last week that a debtate on forcing private lenders to take losses through debt restructuring would quickly raise the cost of borrowing by vulnerable eurozone governments.

But German Chancellor Merkel shot back on Tuesday, replying "I don\’t believe so," she said when asked if the debate itself could increase the likelihood of a country having to seek help.

"We\’re talking here, in an explicit manner, of a mechanism we want to introduce after 2013," Merkel stressed.

Capital Economics senior economist Jennifer McKeown agreed that proposals for a permanent crisis resolution mechanism could "have counter-productive effects on member countries’ fiscal consolidation efforts" because higher costs would make it harder to reduce debts.

But she acknowledged that "the establishment of a proper framework under which a country might default in an orderly manner is arguably a vital pre-requisite for the long-term survival of the single currency."

Finally, the ECB is unhappy with an agreement reached by eurozone finance ministers on reform of economic governance because it leaves the decision to slap sanctions on profligate governments in the hands of politicians.

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