Debate rages over ECB's bond plan

FRANKFURT, Germany - Debate raged on among Europe's top bankers Monday over the merits of a proposed plan for the European Central Bank to buy government bonds to lower borrowing costs for financially troubled governments.

Germany's national central bank, the Bundesbank, is increasingly isolated in its opposition to the plan, saying it would expose taxpayers to risks and could leave countries dependent on the financial relief as though on a drug.

Bundesbank head Jens Weidmann says bond purchases would also be too close to an outright bailout of governments, which the ECB is forbidden from doing by treaty.

The European Union treaty's provisions are meant to prevent the ECB from printing money to cover government debts, a practice which can cause inflation and compromise the bank's political independence. It is also meant to keep it from bailing out one member country at the expense of the others without governments having a say.

But Joerg Asmussen, the top German at the ECB and a member of the six-strong executive board, said any purchases of government bonds would be carefully designed to avoid violating the treaty.

Asmussen said details were still being worked out and would be discussed at the next meeting of the bank's governing council on Sept. 6. But he said "any concerns about treaty-violating financing of governments will be removed."

Weidmann and Asmussen are part of the ECB's broader 23-member governing council, which sets policies monthly. When they meet in that capacity, neither represents German interests but rather those of the 17-country eurozone as a whole.

The remarks by Asmussen suggest German opinion is not unanimously against the idea. Chancellor Angela Merkel sounds open to the ECB plan as well, and Weidmann was the only member of the governing council to oppose the idea.

Weidmann warned in an interview in der Spiegel magazine that bond purchases could "be as addictive as a drug" because they can lead to governments depending on such outside help rather than doing politically painful things such as cutting budget deficits.

He has only one seat on the ECB's 23-member government council, but has support from many economists, legislators and voters in Germany. Analysts say any measures to fight the eurozone debt crisis will have difficulty succeeding if Germans are not broadly willing to support them.

Asmussen conceded that the bank's emergency tactics meant that some might doubt the bank's commitment to its policy "pillars" - fighting inflation, remaining independent of politicians, and not engaging in bailouts.

"I am aware, that many ask, to themselves or publicly, whether these pillars are still standing. We must take these concerns seriously," he said.

ECB president Mario Draghi said on Aug. 2 that the bank may buy government bonds to drive down excessively high borrowing rates for heavily indebted governments. The purchases would push bond prices up and lower interest yields, since yield and price move in opposite directions. Lower yields would then be reflected in government borrowing costs when they sell bonds.

Draghi said the purchases would be aimed at making sure the central bank's low interest rates are reflected in other short-term interest rates throughout the eurozone - a purpose consistent with its legal mandate.