The ECB faces a crucial test of its resolve to do ''whatever it takes'' to preserve the euro when it decides this week on buying government bonds. As Katie Gregory reports European shares hit a seven year high as the week got underway on the expectation of action.
It's a tale of Great Expectations... European shares riding high on the hope Mario Draghi will start the new year, announcing new monetary stimulus. The ECB doesn't meet until Thursday but knowing some form of QE is almost certainly in the pipeline, European shares hit seven-year highs. Robert Halver is from Baader Bank. (SOUNDBITE) (German) CAPITAL MARKET ANALYST FROM BAADER BANK, ROBERT HALVER, SAYING: "The ECB will do what the other central banks have already done - the Japanese, the Americans - and drop the last stability safeguards. It cannot happen that there is another sovereign debt crisis and the ECB will prevent this by carrying out acquisitions. The question is just how much they will be." In what can only be read as a pre-emptive measure, last week's shock decision by the Swiss National Bank to scrap its currency cap is still being digested by rattled markets. And with the euro now close to 11 year lows investors are betting on Draghi taking action. Alastair McCaig from IG says that now it's no longer an issue of if, but how the ECB structures a QE scheme to suit everyone's interests and when that cash injection will come. (SOUNDBITE) (English) IG MARKET ANALYST, ALASTAIR MCCAIG, SAYING; "There is of course always the chance that Mario Draghi and his team will not be able to agree with all parties as to the exact methodology of introducing this, but I think even if something isn't actioned on Thursday we'll get very strong confident signals that it will be imminent thereafter." Germany is still strongly opposed to bond buying and there are concerns the ECB might be swayed toward a plan that is too "light" and limited in volume. There's also a Greek election this weekend which could encourage policy makers to delay any substantial commitments. (SOUNDBITE) (English) MARKET ANALYST, IG, ALASTAIR MCCAIG, SAYING; "The rumours certainly doing the rounds are around 500 billion euros worth. I guess the question mark always is on the back of setting a target it gives the markets something to aim for, something to talk about and something to speculate around." For now investors are on a knife edge. Any decision from Draghi can't come soon enough, and it may well be the toughest in the bank's 16 year history.