Strict Germans may derail Draghi’s plan to aid Spain

 
Tim Wallace
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EUROPEAN Central Bank boss Mario Draghi has a tough series of negotiations ahead if he is to persuade German policymakers to back his plan to use the ECB to ease some of the pressures on the troubled Spanish government’s finances.

Draghi last week pledged to do “whatever it takes” to keep the euro together – which could include using the ECB and the Eurozone’s bailout funds to buy Spanish bonds and bring down the government’s borrowing costs.

Over the weekend he was joined by Italian Prime Minister Mario Monti and Eurogroup leader Jean Claude Juncker.

Markets soared on Draghi’s promise, but the Bundesbank representative at the ECB Jens Weidmann and Germany’s finance minister Wolfgang Schaeuble both oppose the plan and will need to be convinced if any action is to be taken.

Draghi is expected to meet Weidmann on Thursday, in an effort to persuade him ahead of the ECB’s policy announcement that day.

The central bank boss believes it is within the ECB’s mandate to buy bonds if yields are so high that they impede the proper functioning of monetary policy.

But Weidmann has in the past complained that the ECB would take excessive risks by buying weak governments’ debts.

German policymakers have long opposed this kind of action – Jeurgen Stark resigned from the ECB in September 2011 making the same argument.

Schaeuble dismissed claims that Spain is about to request help from the bailout funds, telling a German newspaper: “There is nothing in it.”

German Chancellor Angela Merkel stood by the plans made at last month’s summit, including promises to create a single Eurozone banking authority, expected to be based around the ECB, and to allow the rescue fund to inject cash directly into stricken banks and intervene in bond markets.

And after a conference call on Friday, Merkel and French President François Hollande said in a statement that “European institutions ... must fulfil their obligations”.