THE European Central Bank (ECB) is facing a crucial test of its resolve to do “whatever it takes” to preserve the euro when it decides this week on buying government bonds to combat deflation and revive the economy.

    The European Union top court’s adviser and the Swiss National Bank have smoothed the way for quantitative easing (QE), or printing money, but fierce opposition from Germany’s central bank, politicians and public may yet shackle the ECB.

    At issue is no longer whether the bank buys sovereign bonds, which has been widely flagged, but how the program is designed and whether it is seen as credible and sufficient.

    The risk is that the institution that has held the single currency area together through five years of debt crisis adopts a “QE-lite” plan that sends the wrong signal to markets, misses its target and jeopardizes the bank’s credibility.

    News that ECB President Mario Draghi met German Chancellor Angela Merkel privately last week highlights the acute political sensitivity of the decision. While the Bundesbank is opposed to the policy, which it sees as a back door to monetary financing of feckless governments, creating potential liabilities for German taxpayers, the ECB is hoping Merkel won’t denounce it and will restrain her conservative allies.

    Some QE supporters fear Draghi may make too many concessions to Germany by framing a program that is limited in volume and scope, doesn’t share risk across borders and excludes buying bonds of countries with the lowest credit ratings.

    A draft plan circulated by ECB staff this month would cap purchases at 500 billion euros (US$650 billion). Some market analysts say it may need to be twice that size or open-ended to reach its objective.

    Draghi has a majority on the policymaking Governing Council but the two German members, Bundesbank president Jens Weidmann and ECB executive board member Sabine Lautenschlaeger, seem sure to vote against QE. A handful of other governors may join them.

    One option seriously under consideration, ECB sources say, is to make each national central bank in the 19-nation Eurosystem shoulder the risk of default on all or most of its own country’s bonds that are purchased.

    “This would be at best ineffective and at worst dangerous,” said Guntram Wolff, director of the Bruegel economic think-tank in Brussels. “(It) would be a strong signal that the ECB is no longer a ‘joint and several’ institution.”(SD-Agencies)