Draghi weighs QE compromise showcasing unity shortfall

FRANKFURT: Mario Draghi is weighing how much a compromise on euro-area stimulus would reveal about the currency bloc's fault lines.

As the European Central Bank president and his Executive Board sit down today to formulate a bond-buying proposal to fend off deflation, one option is to ring-fence the risks by country. While that may win over some of Draghi's opponents when the Governing Council meets on Jan. 22, it might also shine a spotlight on the lack of unity within the union.

"An absence of risk-sharing could be taken as a bad signal by the market with respect to the singleness of monetary policy and could be selfdefeating," said Nick Matthews, senior economist at Nomura International Plc in London. "However, it may prove to be a necessary compromise to make the design of QE more palatable for Governing Council members, and is preferable to having to limit the size of the program." Investors are banking on Draghi to announce quantitative easing at his press conference after the council meets, with economists in a Bloomberg survey estimating the package at 550 billion euros ($640 billion). What remains unclear is how far he'll go to mollify critics who say unelected central-bank officials are shifting risk from weaker to stronger nations.

The tension surfaced again yesterday at a conference in Dublin. Irish Finance Minister Michael Noonan said having national central banks buy government bonds would be "ineffective," drawing a response from ECB Executive Board member Benoit Coeure. "The discussion is how to design it in a way that works, in a way that makes sense," Coeure said. "If this is a discussion about how best to pool sovereign risk in Europe, and how to make the pooling of sovereign risk take a step forward in an environment where the governments themselves have decided not to do it, then this is not the right discussion."

Klaas Knot, the Dutch central-bank governor, told German magazine Der Spiegel last week that "we have to avoid that decisions are taken through the back door of the ECB." Spiegel reported on Jan. 16 that the latest QE plans envisage national central banks buying the debt of their own country. Frankfurter Allgemeine Sonntagszeitung said two days later they would be liable for at least half of any losses that may arise from buying bonds issued by their own country. Neither publication said where it got the information.

German Chancellor Angela Merkel signaled yesterday that she won't stand in the way of Draghi's plans, saying her only request is that any ECB action this week mustn't diminish pressure on governments to make structural reforms. "It has to be prevented that actions of the ECB seem in any way to push what has to be done in the area of fiscal policy and competitiveness into the background," she said at Deutsche Boerse AG's New Year reception near Frankfurt.

QE is supposed to boost inflation and stimulate growth by pushing investors into riskier assets, including outside the euro area and so weakening the currency.