By Francesco Canepa
FRANKFURT (Reuters) - Christine Lagarde will face a momentous decision in her first year as European Central Bank President: give up on reviving inflation or give in to the temptation of bankrolling governments with neverending bond purchases.
The ECB pledged on Thursday to buy bonds "for as long as necessary" for inflation expectations in the euro zone to rise to its aim of just under 2 percent - a commitment that will haunt the central bank's decision-makers long after current boss Mario Draghi steps down on Oct. 31.
With the bloc's economy reeling from a global slowdown and incapable of generating enough growth domestically, the ECB could be in the market for years to come, gobbling up significant swathes of the bonds issued by indebted governments.
Squaring Draghi's pledge with rules that ban the central bank from financing countries' deficits, and increasingly vocal discontent from some unhappy ECB policymakers, will be Lagarde's first challenge when she takes office on Nov. 1, the very day the bond-buying gets underway.
"A purchase programme forever means either the final breach of all European Treaties and the beginning of full state financing... (unless) Draghi and his successor get what they want: an inflation rate of 2 percent or more," Sentix, a Frankfurt-based research firm, wrote in a note.
Odds on the latter happening any time soon were long, with the ECB itself expecting inflation of just 1.3%-1.6% between this year and 2021 and market gauges of long-term price growth stuck even lower.
But Lagarde won't have the luxury of waiting.
In roughly a year the ECB will have bought a third of Germany's outstanding government debt, according to estimates by U.S. brokerage Jefferies, coming up against a self-imposed limit.
Scrapping that cap - designed to prevent the ECB from becoming a blocking minority in any debt restructuring - or diverting purchases to other countries would likely invite fresh legal challenges and accusations Frankfurt is rewarding profligate governments.
But giving up on the ECB's mission to bring inflation back to its target was not an option for an institution that has price stability as its sole aim.
Lifting of the share of a country's debt that the ECB could own - likely to 50%, which would still prevent it from becoming the majority owner - was seen by analysts as a possible solution.
This would see Frankfurt go down the route of the Bank of Japan (BoJ), which has hoovered up 45% of its government's debt as part of an increasingly desperate effort to revive a stagnant economy via quantitative easing (QE) and fiscal largesse.