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Will Germany Thwart the European Central Bank's Fight Against Deflation?

Despite record-low interest rates, European economies remain sluggish.

Will the European Central Bank try bond purchases to stimulate economic growth?

Not if Germany has its way, according to a July 23, Bloomberg article titled, "Draghi Faces German Hard Line on Avoiding Deflation."

Here's an excerpt:

Germany's intransigence is ... in play as Draghi, the Italian president of the European Central Bank, mulls whether to enact quantitative easing to prevent deflation. He has cut interest rates to record lows and pledged fresh loans for banks last month to little effect so far.

The euro has barely budged against the dollar and the Euro Stoxx 50 Index (SX5E) is up just 2.6 percent for the year compared to the Standard & Poor's 500 Index's (SPX) 7.3 percent gain.

Why the lack of response? To London-based Simon Derrick [of Bank of New York Mellon Corp.], the answer lies in the ECB's failure to press the bond-buying button and the reason for that lies at the feet of Bundesbank President Jens Weidmann, who recently spoke in favor of a strong currency and against the ECB purchasing assets.

"Now more than ever there are economic reasons not to buy government bonds," Weidmann told Sueddeutsche Zeitung newspaper in May. "Why should the ECB now intervene in these markets and try to drive the interest rates down further?"

If Draghi can't or won't take on the German intransigence, he faces "the potential for a continued weakening of regional equity markets and even the possibility of a resurgence of the euro zone crisis," according to Derrick.

You can read the entire article by following this link:
http://www.bloomberg.com/news/2014-07-23/draghi-faces-german-hard-line-on-avoiding-deflation.html

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