By Paul Taylor
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The federal institution at the heart of the 17-nation currency area could declare itself Europe's lender of last resort, reassuring markets that there will always be someone to buy member states' bonds.
Economists from New York to Beijing are convinced such a move, backed by the central bank's power to print money, would stop the run on Italian and Spanish debt swiftly and help restore confidence in the euro area.
But it runs counter to half a century of German monetary orthodoxy and would require a change in the EU's governing treaty to remove a prohibition on the central bank funding governments, which Berlin would be certain to oppose.
Making the ECB the euro zone's ultimate backstop is the course advocated publicly by non-euro Britain and privately by some U.S. policymakers, but it looks unlikely any time soon.
A second option, pushed in vain so far by French President Nicolas Sarkozy, would be to let the euro zone's 440 billion euro rescue fund act like a bank and borrow money from the ECB to intervene in the bond market.
Lawyers differ on whether that would be permissible under the treaty, but German Chancellor Angela Merkel has declared it unacceptable and the ECB itself is not keen.
French officials say Sarkozy has not abandoned the idea, which may return if the remedies agreed at last week's twin-summit marathon negotiation fail -- reducing Greece's debt to the private sector, a bond insurance role for the rescue fund and a special purpose vehicle to lure foreign investors.
Despite the 24-hour relief rally that greeted the deal struck in the early hours of Thursday, there are strong reasons to doubt that the crisis can be overcome without greater help from the central bank.
In the short term, the ECB could simply declare that it will continue its current Securities Markets Programme (SMP) of buying limited quantities of bonds of countries under fire in the markets as long as exceptional market conditions prevail.
That would send the market a clearer signal but still risk alienating the central bank's biggest constituency, Germany, while relieving the pressure on governments in southern Europe to carry out painful reforms.
Incoming ECB President Mario Draghi, who takes over from Jean-Claude Trichet in Frankfurt on Tuesday, dropped a strong hint in that direction in his final speech as Bank of Italy governor last week.
"The Eurosystem is determined, with its non-conventional measures, to prevent malfunctioning in the money and financial markets creating an obstacle to monetary transmission," he said.
Draghi's words were almost identical to those uttered by Trichet when he reactivated the bond-buying program in August. But an aide later suggested Draghi had been referring to ECB operations to provide unlimited one-year liquidity to banks rather than to sovereign bond-buying.
The ECB has bought 173.5 billion euros in bonds of Italy, Spain, Greece, Ireland and Portugal since May 2010, most of them since mid-August to support Rome and Madrid.
The policy was so divisive that the two most senior Germans at the ECB, former Bundesbank chief Axel Weber and outgoing chief economist Juergen Stark, resigned in dissent.
Weber argued that the bond-buying could cause inflation. Stark said it took the central bank beyond its mandate of delivering price stability and brought it closer to politics, putting its independence at risk.
Other critics say the policy has failed to keep those countries' borrowing costs down durably and cannot succeed because it is half-hearted, both in the quantities bought and in the uncertainty about its continuation.
Trichet signaled before leaving office that the bank wanted to exit the unconventional bond-buying business and turn responsibility over to governments once the European Financial Stability Facility had new powers to buy bonds.
But EU officials, speaking on condition of anonymity because of the sensitivity of the matter, said that if the ECB were to stop now, it would pull the rug out from under the euro zone.
"The SMP program must remain. The central bankers can't pull the plug on us," a senior Brussels policymaker said.
"They don't have to say it. They just have to do it."
As an Italian, Draghi is bound to face particular scrutiny in the way he treats his home country and its debt.
The new ECB president has been an outspoken critic of Italy's failure to implement structural reforms of its rigid labor market, generous pension system and highly regulated professions to augment anemic economic growth.
He will be mindful of Trichet's bitter experience of extracting reform promises from Prime Minister Silvio Berlusconi in August before the ECB began buying Italian bonds that were not implemented afterwards.
Trichet has tried to turn the SMP on and off, up and down, like a hosepipe both to stabilize markets and to apply pressure on wayward governments to rein in budget deficits and reform their economies.
However, this defies traditional warnings against trying to use a single instrument to achieve multiple objectives.
The ECB risks becoming a prisoner of its own policy, which it can neither end without risking a bond market meltdown nor step up without making life too easy for Berlusconi.
Draghi and Stark's successor on the executive board, Joerg Asmussen, are from the second generation of European central bankers, potentially less hidebound by orthodoxy than Trichet and Stark, who were among the founding fathers.
At his confirmation hearing in the European Parliament, Asmussen outed himself as a pragmatist, almost a swear-word among the monetary ayatollahs of Frankfurt.
In the short term, expect them to keep buying Spanish and Italian bonds even when the EFSF's new powers are fully operational, which may take a few more weeks due to another appeal to the German constitutional court.
But if the euro zone's latest strategy fails to stop the rot, the ECB's pragmatic leadership will have to become more engaged in fighting the crisis.
(Writing by Paul Taylor; editing by Ron Askew)