France, Germany could agree on ECB’s euro role

November 22, 2011

By Pierre Briançon
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Everyone is a back-seat central banker in the euro zone these days. Well-wishers are flooding Mario Draghi, the new president of the European Central Bank, with advice on how to rid the world of its misery. French government officials have joined the chorus, insisting that the ECB should be “part of the solution” to the euro crisis. So far the ECB is sticking to its longstanding line – it is up to governments to sort out the mess they created. Germany agrees. This doesn’t mean it is on a collision course with France. A deal could even be in the works.

Draghi is in no hurry to follow the new market fad – “quantitative easing”, the indiscriminate buying of euro zone sovereign bonds. If the goal is to fight off recession, bond-buying is not a priority. The ECB still has conventional monetary ammunition; it can and probably will next month cut its key interest rate, from the current 1.25 percent. If the goal is to restrain euro-linked panic and ward off market chaos, the ECB is already buying Spanish and Italian bonds. So the only question is whether it should formally announce that the programme will be more systematic, and backed with the bank’s unlimited resources.

Nothing prevents the ECB from doing more. Its purchases can cap yields. But hesitation is a good way to keep the pressure on governments to make credible economic reforms. It will rightly wait for tangible signs of credible commitments, or even greater investor panic, before acting more forcefully. But when the time comes to act, the ECB is unlikely to be stopped by the German government’s reluctance or the Bundesbank’s explicit opposition.

Like the ECB, both Paris and Berlin want to salvage plans to beef up the euro zone bailout fund. And Angela Merkel is keen on ensuring that tighter fiscal discipline is enshrined into the EU treaty. If the French go along with her demand for stricter rules, and once she is reassured that a similar crisis is unlikely to happen again, Merkel could be persuaded to keep silent if and when the ECB tries to avoid a crisis from turning into a nightmare.


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I wish your preditions will come true. With no credible crises resultion in sight reflecting Merkel’s incompetence, something needs to happen very quickly to avert disaster.

Posted by TB7W1B | Report as abusive

While in principal, the capping of bond-buying does make sense, as does the refusal to QE, in practice it is an extraordinarily reckless approach. The level of fear in the market (and the speed at which events unfold) mean that they are simply not in control. We are only a few shocks (uncovered auctions due to bid-side collapse in the secondary-market, sovereign bond syndicate strikes, the massive bank refi required next year is frankly a non-starter) away from headlines which will provoke EMU-wide retail-deposit bank-runs. This would be end-game for the system and the fallout goes far beyond a mild recession. Stability is needed FIRST, followed by a pact of technocratic governance (to remove subversive partisan-political motivations) in all EMU states to implement the austerity required to produce a lasting stability.

Posted by whirdym | Report as abusive

the first seriously intelligent comment in a long time on this subject;

Posted by Paats-W. | Report as abusive