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Merkel downplays impact of ECB bond move, ally warns against it

[BERLIN] Angela Merkel downplayed on Monday the likely impact on the euro of a European Central Bank decision on money-printing and Greek elections this week, but one of her lawmakers warned that more ECB liquidity risked distorting markets.

Asked if this was a "week of destiny", with the ECB expected to announce on Thursday it will buy euro zone government bonds and Greeks voting for a new parliament on Sunday, the German chancellor rejected such dramatic terminology. "I wouldn't call this a week of destiny for the euro. I have always said the euro crisis has not yet been fully overcome," Merkel told a news conference. "That counted for last week, in the last weeks of 2014, and it also counts for these weeks." On Greece, where leftist party Syriza plans to end austerity policies backed by Merkel if elected, she said all efforts were being made to keep the country in the currency union and that Greeks would vote responsibly.

The ECB will make its decision in complete independence, Merkel said. Germany's Bundesbank has long opposed such a policy of quantitative easing and is still seeking safeguards, including a likely move to make national central banks rather than the ECB bear much of the risk for buying the bonds of member states.

International Monetary Fund chief Christine Lagarde said on Monday the ECB should share as much risk as it can amongst its members, however, while Irish finance minister Michael Noonan warned that a watered-down approach would render QE ineffective.

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Merkel's spokesman Steffen Seibert declined to give details of her meeting with ECB President Mario Draghi last week, highlighting the political sensitivity surrounding the launch of QE to combat deflation and boost growth in the currency bloc.

But one senior lawmaker from Angela Merkel's conservatives, Norbert Barthle, told Reuters he was "not convinced of the need for a massive programme to buy state debt". "The sensible thing would be to wait for the measures taken already to have their effect first," said the budgetary affairs spokesman for the conservatives in the lower house. "The ECB would make a rod for its own back by supporting exaggerations in financial markets via a deluge of excessive liquidity." The Bundesbank sees QE as a back door to monetary financing of feckless governments that would create potential liabilities for German taxpayers.

This argument has a wide following among conservatives like Barthle, a member of Merkel's Christian Democrats (CDU) who is close to Finance Minister Wolfgang Schaeuble, and among German Eurosceptics who have challenged it unsuccessfully in courts. "The ECB's main task was and is to ensure price stability. It should bear that in mind rather than grasping more and more frequently for dubious measures to reflate the economy," said Barthle. Boosting growth required euro zone states to carry out reforms rather than depending on easier monetary policy, which tends to remove the incentive for such reforms, he added.

Despite trenchant German opposition to ECB sovereign bond purchases, the central bank is widely expected to announce such a programme, having exhausted other policy tools. ECB Executive Board member Benoit Coeure said on Monday no decision had yet been reached.

Euro zone inflation turned negative in December, falling to minus 0.2 per cent - far below the ECB's target of just under 2 per cent. Draghi ended his last news conference, in December, by telling reporters: "Not to pursue our mandate would be illegal."