Most recently, German Chancellor Angela Merkel has backed ECB President Mario Draghi, leaving Bundesbank President Jens Weidmann isolated. This will enable the ECB to put a lid on the borrowing costs of countries that submit to an austerity program under the supervision of the Troika (the IMF, the ECB, and the European Commission).

ECB President Mario Draghi has said much the same. Indeed, the upcoming summit is missing an important agenda item a European Fiscal Authority (EFA) that, in partnership with the ECB, could do what the ECB cannot do on its own.

Now the ECB is reacting with force, but, as Japanese policymakers have found, exiting from deflation is far from easy. ECB President Mario Draghi may fail to bring inflation back to 2 .

Increasing tensions between the euro countries on economic policy are likely, as are growing rifts within the ECB governing council in the coming years. We might get a sneak preview this year and in 2011, when European leaders must select a new ECB president and vice president.

So far, the social partners, as ECB president Jean Claude Trichet likes to call the unions, have been quiet. Should this change, the ECB will have to raise rates even if Europe s economic growth remains slack.

With European interest rates up 200 basis points since late 2005 and the euro near a record high, Sarkozy wants the ECB to stop raising rates now. ECB president Jean Claude Trichet and the Governing Council strongly disagree.

The old Bundesbank was laid to rest on September 6, when the ECB adopted its outright monetary transactions program unlimited purchases of distressed eurozone countries government bonds over the objections of a lone dissenter Bundesbank President Jens Weidmann. And the undertaker was not ECB President Mario Draghi it was German Chancellor Angela Merkel.

Capturing the ECB

The old Bundesbank was laid to rest on September 6, when the ECB adopted its outright monetary transactions program unlimited purchases of distressed eurozone countries government bonds nbsp over the objections of a lone dissenter Bundesbank President Jens Weidmann. And the undertaker was not ECB President Mario Draghi it was German Chancellor Angela Merkel.

Furthermore, and contrary to common belief, the ECB president need not be very diplomatic, but should be able to unite all members of the ECB s Governing Council. As political pressure on central banks, including the ECB, increases, its president must not hesitate to criticize European politicians and, if necessary, publicly name and shame them.

The ECB Grows Up

European Central Bank (ECB)

The recalcitrance of the holdouts against the consensus a direct challenge to Trichet s leadership gave the ECB president little alternative. What was he to do?

Is the ECB Doing Enough?

The ECB and Its Critics

Ecb Is Now Europe s Anchor

Germany s Case Against the ECB

He followed Bundesbank President Axel Weber, who had resigned in February because of the earlier bond repurchases. Meanwhile, the new Bundesbank president, Jens Weidmann, openly objects to the program, while German President Christian Wulff has publicly accused the ECB of circumventing the Maastricht Treaty.

Jean Claude Trichet, the current ECB president, may be in the same job but not the same environment as his predecessor Wim Duisenberg, who famously remarked, I hear the politicians, but I don t listen. Political pressure on the ECB today is much greater than in Duisenberg s time.

A Yes vote, on the other hand, would encourage a reassured Chirac to continue his policy of no reform and scapegoating the ECB. External political pressure on the ECB and its president, Jean Claude Trichet, to lower interest rates and talk the euro down surely would increase.

Given the fact that the current ECB vice president is from southern Europe (Portugal), the next head of the ECB must come from northern Europe. Only someone from Germany, the Netherlands, or a Scandinavian euro country like Finland can count on support from Germans, which is crucial.

Helping the ECB Cross the Rubicon

Why the ECB Should Buy American

The ECB Picks Up The Pace

Trichet Takes Control At The ECB

Who Next at the ECB Helm?

LONDON Mario Draghi, the president of the European Central Bank, has repeatedly claimed that the ECB will do everything necessary to save the euro. Nothing has been formally agreed yet, but the ECB is expected to announce a new government bond buying program following next week s meeting of its Governing Council.

In Germany, Axel Weber resigned as President of the Bundesbank and member of the Governing Council of the ECB last January, reportedly because his statements opposing the Banks purchases of troubled eurozone countries bonds reflected his political naivety. The press could not imagine that a technocrat might voluntarily relinquish a sure shot at a position of great power successor to Jean Claude Trichet as ECB President on a matter of principle.

That would be a good thing. With Sarkozy off his back, ECB President Jean Claude Trichet might feel freer to cut interest rates to counter the impending economic slowdown in Europe.

To fund these redemptions on behalf of some member states, the ECB would issue bonds in its own name, guaranteed solely by the ECB, but repaid, in full, by the member state. Upon the issue of such an ECB bond, the ECB would simultaneously open a debit account for the member state on whose behalf it issued the bond.

Similarly, the euro collapse scenario in which such countries successfully pressure the ECB to inflate, compelling Germany to abandon the euro, has shown no signs of developing. The ECB, protected by statutory independence and a price stability mandate, has shown no inclination to accede to pressure from French President Nicolas Sarkozy or anyone else.

Italian bond rates had already been falling before ECB President Mario Draghi announced the conditional bond buying plans. That reflected the substantial progress Italian Prime Minister Mario Monti s government had already made.

That is what the ECB is now throwing away.

Indications that Trichet s communicative skills were slipping already had become evident last September, when the Governing Council could not follow through with the rate increase the ECB president had promised the previous month.

Ecommerce and Development Report 2003, UNCTAD SIDTE ECB 2003 1.

There will also be potentially dangerous consequences for the ECB itself. The use of the Lisbon Treaty clause means that the ECB must be given these additional responsibilities.

E commerce and Development Report 2003, UNCTAD SIDTE ECB 2003 1.

For all these reasons, purchasing private sector securities alone will not enable the ECB to achieve its stated goal of expanding its balance sheet by 1 trillion ( 1.2 trillion). Unable to vanquish the specter of deflation, ECB President Mario Draghi will need to continue working to build a consensus even better, unanimity within the bank s governing board for purchases of government bonds.

ECB President Jean Claude Trichet indicated at his July press conference that the bank plans to raise interest rates by 25 basis points on August 3, not August 31, as expected. This implies an interval of two months between interest rate moves instead of the three month interval that has become standard ECB practice in the current interest rate cycle.

As holders of euro denominated assets recognized this situation, they turned to the ECB for insurance (which the ECB could not deliver under its previous president, Jean Claude Trichet, whose leadership was defined by his commitment to maintaining price stability). Investors subsequent efforts to price in the risk of a eurozone breakup not the volume of sovereign debt caused bond yields to spike.

Encrypt an input value with TripleDES under 2.2.x in ECB mode

Approval of fundamental changes in the currency union must be agreed by all members, and so will not be forthcoming. Nor will ECB President Jean Claude Trichet be intimidated by French pressure to pursue a softer monetary policy.

The more French president Nicolas Sarkozy attacks the European Central Bank and the strong euro, the more he is criticized in the European media, by European finance ministers, European Union officials and the ECB itself. The critics are right.

If savers in Portuguese banks start moving their money to Germany, the ECB will recycle these euros back to Portugal through interbank deposits. Again, there is no limit to how much money the ECB can recycle, provided Portuguese banks remain solvent which they will, so long as the ECB continues to buy Portuguese government bonds.

There was nothing inevitable about this outcome. Just last month, ECB President Mario Draghi provided a textbook example of how these negotiations could, and should, have progressed, when he outmaneuvered German opposition to the monetary stimulus that Europe clearly needed.