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Markets tumble after European bank fails to promise bond bailout

The European Central Bank's announcement today expressed a willingness to prop up the bond market but without providing any specifics on how much it would spend, for how long, or starting when, dashing expectations that the continent had unified around a remedy for the eurocrisis.

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The other camp consists of Germany, Austria, the Netherlands, and a number of other northern European countries, who believe that starting the printing press will not only induce inflation, but also diminish the pressure on eurozone governments to cut spending and reform their uncompetitive economies. Northern members also are opposed to all attempts at pooling debt, making the whole of the currency union liable for the arrears of individual member states.

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Earlier hopes dashed

Just a week ago, it had seemed that this fundamental disagreement had been settled. 

On July 26, Draghi told the Global Investment Conference in London, that, “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

His statement was widely read as the long-awaited announcement of a new bond-buying program. The ECB has already spent €211 billion on acquiring debt of eurozone members, despite resistance from Germany, but stopped doing so earlier this year.

After Draghi’s promising London announcement, German Chancellor Angela Merkel, French President François Hollande, and Italian Prime Minister Mario Monti, issued joint statements, echoing Draghi’s words. It seemed clear that German opposition to the program must have waned.

But the vagueness of today's announcement left investors deciding German opposition remains.

No end in sight

Nor does there appear to be an end to this conflict in sight. “If the ECB were to buy government bonds we’d be financing failing governments through the backdoor,” says Alexander Dobrindt, a leading conservative Member of Parliament in Germany.

Jürgen Stark, a former German member of the ECB council, says buying more bonds would betray the German taxpayer: “It is not just contravening European agreements, like the Maastricht Treaty. It would also mean breaking promises our government has given to the German nation.”

But there may be no alternative, says David Owen, economist at Jefferies, a London-based investment bank. “A year ago, when the first bond-buying program was started, the situation in the eurozone was not nearly as critical as it is now,” he says. He expects that within the next weeks the ECB will specify which “unconventional measures” it is willing to take to save the euro.

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