European policymakers split on stimulus plans
Updated: 2011-09-13 07:44
By Gabi Thesing and Jeff Black (China Daily)
FRANKFURT - Mario Draghi may find it harder to keep the European Central Bank (ECB) in the vanguard of the battle against the eurozone's debt crisis after ECB executive board member Juergen Stark resigned in protest at the bank's bond purchases.
With speculation of a Greek default heaping pressure on the ECB to step up its bond buying and reverse interest rate increases to ease market tensions, Stark's shock move has publicly exposed a rift among policymakers that may undermine its ability to act quickly, economists said. German opposition to further ECB stimulus may also make Draghi less inclined to ease policy when he takes over from ECB President Jean-Claude Trichet on Nov 1, said Marco Valli, chief eurozone economist at UniCredit Group in Milan.
"It would be very easy for Germans to say here comes the Italian, he'll cut rates and buy government bonds in massive amounts," Valli said. Draghi "will probably prefer to err on the side of hawkishness on standard measures, which means he may be reluctant to go for a rate cut".
The ECB has shouldered the main burden of fighting the crisis as governments dithered over fixing their budget deficits, restructuring their banks and giving more firepower to the region's rescue fund. Investors last week dumped stocks and pushed the euro to a six-month low on renewed fears that policymakers will fail to prevent a Greek default. Stark's resignation on Friday further unsettled markets by raising doubts about the ECB's commitment to do what is needed to hold the 17-nation eurozone together.
"It's bad news because the ECB is the only functioning European institution. It's supposed to be an anchor of stability," said Laurent Bilke, a former ECB economist now working at Nomura International in London. "For the central bank to be functioning in its role, its interventions need to be forceful. This whole affair will put them and any decision they make under the spotlight."
Stark, a former Bundesbank vice-president, cited "personal reasons" for his decision and will remain in his role as the ECB's chief economist until a replacement is found for him on the six-member executive board. German Finance Minister Wolfgang Schaeuble said on Saturday he will propose his deputy, Joerg Asmussen, for the job.
Bundesbank President Jens Weidmann also opposed the ECB's decision to reactivate its bond purchase program last month, when it started buying Italian and Spanish assets after the debt crisis spread, an official familiar with the discussions said.
Asmussen and Weidmann were both economics students of Axel Weber, the former Bundesbank president whose opposition to the ECB's bond program led him to resign in February and drop out of the running to succeed Trichet.
"This is the second resignation in less than a year - this is clearly not good news," said Klaus Baader, co-head of eurozone economic research at Societe Generale in London. "This will raise doubts about the real commitment of Germany to the ECB, and that is why it's highly damaging."
Stark's resignation may harden German public opinion against the region's rescue fund, making it harder for governments to fight the crisis, said Joerg Kraemer, chief economist at Commerzbank AG in Frankfurt. It "makes the European bailout scheme more unpopular among German voters, which lowers the long-term credibility of the bailout policy among investors", he said.
Fifty-three percent of Germans oppose further aid for Greece and would not save the country from default if it does not fulfill the terms of a rescue, Bild am Sonntag newspaper reported on Sunday, citing a poll.
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