The European Central Bank’s Governing Council discussed a package of asset purchases worth about €125 billion ($170 billion) this month, more than twice the amount finally agreed upon, people briefed on the talks said.

Germany’s Axel Weber opposed buying assets and argues the ECB should maintain its focus on getting banks to lend to each other again. Smaller countries in the 16-nation euro area pushed for the ECB to follow the Federal Reserve and the Bank of England in buying a broader range of assets to pump money into the economy and counter the possible risk of deflation.

“For an economy the size of the euro zone, 60 billion is chicken feed,” said Peter Dixon, an economist at Commerzbank AG in London. A sum of 125 billion euros is “more realistic, though it’s still half of what you’d like to see.”

The ECB’s plan is worth 0.6 percent of euro-region gross domestic product. Asset-purchase programs by the Federal Reserve and the Bank of England amount to about 12 percent of US GDP and 10 percent of UK GDP.

Diversity

The diversity of views on the ECB’s 22-member council may make it harder for Trichet to restore consensus at the central bank and help an economy struggling to escape its worst recession since World War II. Before the May meeting, Trichet asked council members not to publicly debate the next policy steps, Austrian governor Ewald Nowotny said on April 30.

Slovenian central bank chief Marko Kranjec said in a May 13 interview that “we don’t exclude the purchase of first-class corporate bonds” and “short-term securities such as commercial paper.” He also said that an increase beyond 60 billion euros was “very likely.”

Six days later, he said that the comments were taken “out of context.”

Slovakia’s Ivan Sramko said May 14 he “can exclude nothing” on non-standard measures. Nowotny, in a speech on central banks in general, said they can buy government bonds when interest rates near zero. He later moved to “avoid some misunderstandings,” saying policy makers had a “clear common view.”

‘Unbearable cacophony’

Bundesbank President Weber on May 13 insisted that 60 billion euros was the “maximum” the ECB will spend on assets and said inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected.

Athanasios Orphanides from Cyprus, the former Fed economist who has argued for an aggressive response to the financial crisis, warned the same day that deflationary expectations must not be allowed to develop.

“You have completely conflicting signals from different members, creating confusion,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “There may come a time when this cacophony becomes unbearable.”

“Intervention by Trichet to restore a certain order would help,” said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan.

‘Full blown’

Asked on May 7 whether the ECB had considered buying other assets, Trichet said: “We have decided to engage in the purchase of covered bonds” and “have not taken any other decision on any other purchase.”

He said the ECB will give details of its covered bond purchases after its next council meeting on June 4. The securities have suffered a slump in demand during the crisis.

Weber “will block any further attempts to buy assets,” said Nick Kounis, chief euro-region economist at Fortis in Amsterdam. “As long as the Bundesbank is against it, we won’t get a full-blown” asset-purchase program.

The ECB this month cut its benchmark interest rate to a record-low 1 percent and Trichet said that’s not necessarily its lowest level. While Weber wants to make 1 percent the floor for the key rate, others say deeper cuts may yet be necessary.

Council members have also disagreed about the outlook for Europe’s recovery. Vice President Lucas Papademos said last week that “the recovery may start sooner than previously envisaged,” while Dutch official Nout Wellink warned against becoming “too optimistic when you see a few swallows flying around.”

Source: Bloomberg