Split Over ECB Reflects Europe's Divisions - WSJ.com

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"Established in 1998, the ECB [European Central Bank] was founded on a German principle that strictly separates central bankers from governments, a principle rooted in Germany's own history. In the early 1920s, its Reichsbank bought massive amounts of government bonds it paid for by printing money.

The result was hyperinflation, an episode that scars Germany's psyche as much as the Depression does in the U.S. The Reichsbank's successor, the Bundesbank, safeguarded Germany's postwar recovery by focusing on a single mandate to keep inflation low, a duty enshrined in the ECB's charter.

Its first president, Dutchman Wim Duisenberg, was so grounded in the tradition of central-bank independence that he was known to tell politicians "I hear you, but I don't listen."

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Proponents of a broader ECB role say Europe's politicians lack the means to cope with a crisis of this severity even if they could overcome their differences. They contend the only way to forestall a collapse of the euro is for the central bank to declare that it will underpin the bond markets of all euro-zone governments.
Germany's worry is that such a move would spark a debilitating inflationary spiral. Germans' visceral rejection to printing money is so strong that endorsing such a course could amount to political suicide for Ms. Merkel and her coalition.
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"They need to go into the market and say we have a wall of money here and no matter how much speculation there is, we are going to keep buying Italian bonds and any other euro bonds that are threatened," Irish Finance Minister Michael Noonan has said.
That would mark a dramatic departure from the central bank's charter, which restricts its role to maintaining price stability through monetary policy, the setting of interest rates.
The euro zone's architects purposely limited the ECB's purview to shield it from political influence. Independence, they believed, would instill confidence in the long-term viability of the common currency, convincing both investors and ordinary Europeans that the bank's power to create money wouldn't be used to remedy political folly.
By testing the limits of its charter, the ECB has opened itself to accusations that it has traded principle for expediency, inviting disaster. Within the ECB, opponents of further action argue that the moves have already put the central bank's reputation at risk.

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Others warn that the bond purchases could invite reckless fiscal behavior by governments, a phenomenon often referred to as "moral hazard."
The credibility issue is central for skeptics of ECB bond buying. If the ECB were to give in to government demands for more aggressive action, the German public could lose confidence in the euro as a stable currency.
German economists contend that since the ECB prints the money to buy bonds, the extra funds it injects into financial markets when it makes bond purchases threaten to increase inflation. European inflation is currently about 3%, versus the ECB's 2% target.

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Other big central banks, particularly the Fed, have interpreted their mandates more broadly to preserve financial stability. The Fed, which unlike the ECB also has a mandate to maximize employment, has purchased large amounts of Treasury bonds to keep long-term interest rates low and has bought mortgage-backed securities to help housing.