Euro crisis: Why the ECB is split over further action

ECB governing council
Image caption The European Central Bank's Governing Council makes decisions on the basis of one-person-one-vote

It's not as though the signals didn't seem clear.

On 26 July, the president of the European Central Bank (ECB), Mario Draghi, gave a speech to an audience of financiers at the Global Investment Conference in London.

The markets read it as a thinly-coded message that the borrowing problems of Spain and Italy would be eased.

It's true he didn't mention the countries by name but they were at the top of the economic and political agenda because their borrowing costs were rising and rising towards crisis point.

In this atmosphere, Mr Draghi said, according to the ECB record of it: "There is another message I want to tell you. Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough".

Traders pressed the "buy" button. Stock markets jumped and the cost of borrowing to Spain and Italy fell. The words had let the steam out of the cauldron.

As though to emphasise the message, Chancellor Angela Merkel echoed it - twice - in the following days.

Now, it seems, there was a misreading.

'No execution of promises'

After the monthly meeting of the ECB's governing council which makes the big decisions, it is clear that there would be ECB intervention in the bond markets if necessary - but also that much remained to be decided about how exactly it would be done.

"Over the coming weeks, we will design the appropriate modalities for such policy measures", as Mr Draghi put it.

And stock markets fell. What had seemed certain to them and the analysts who form opinions suddenly seemed not so certain.

As Annalisa Piazza, of Newedge Strategy, put it: "The tone of his answers during the Q&A session seems to suggest that no agreement has been found amongst policymakers."

So what happened?

German resistance

One possibility is that the president of the ECB really was misunderstood in his London speech.

The markets read it as promising more than was ever intended. If so, they might ask why wasn't the overly-optimistic reading clarified?

Crisis jargon buster
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The best credit rating that can be given to a borrower's debts, indicating that the risk of borrowing defaulting is minuscule.

Or Mr Draghi promised what then met German opposition. The two now have to negotiate, with talks about what kind of conditions should be put on help.

On this reading, Mr Draghi was promising radical action - but the detail still has to be negotiated within the ECB, where German doubts remain. Markets and journalists want instant answers but financial mechanisms need thinking about.

Mr Draghi himself said after the ECB that he wasn't undoing his words: "I'm actually quite happy about these remarks", he said.

But there may now be a fight on between him and the two powerful Germans on the Governing Council, Jorg Asmussen, formerly of the German finance ministry, and Jens Weidmann, currently of the Bundesbank.

Before the ECB meeting, Mr Draghi met Mr Weidmann and Mr Draghi conceded in the press conference afterwards that there were differences.

"It's clear and it's known that the Bundesbank have their reservations about the programme of buying bonds", but he added that various committees of the ECB will work on the matter and "take a final decision and the votes will be counted".

Decisions in the ECB are taken on the basis of one vote per member of the Governing Council - the head of the central bank of Greece or Italy or Spain has the same number of votes as the head of the Bundesbank - it is one man one vote on the 23-man - all men - council.

If there's a tie, Mr Draghi, as president of the ECB, has the casting vote.

But you can't take out politics, either. Germany as the primary donor clearly has more clout because of the size of its wallet.

But also the members of the Governing Council have views.

They do not come to the table with their heads scrubbed clean of thoughts of home - and what's been happening at home in some of the countries has been painful, with rising unemployment and shrinking output.

The ECB's mandate is to control inflation not unemployment and growth - but it may be hard to keep the strict line as recession really bites. The alliances and agreements on the Governing Council may shift.

The German magazine Der Spiegel reported that "the ECB president has become thin-skinned and easily irritated by criticism, especially when it comes from Germany". It said that witnesses described a discussion which was going along cold, legalistic lines, and then Mr Draghi reacted: "Such questions, he snapped at his opponents, could not always be discussed in exclusively legal terms."

Mr Draghi denied having said that, but there is a sense now of the ECB being split, with the divisions yet to play out.

And Germany may not have the votes but it does have the money.