By Tom Fairless

FRANKFURT -- Mario Draghi risks becoming Europe's political piñata this year because of highly charged elections in the eurozone's biggest economies.

Barely a month after announcing a half-trillion-euro extension of the European Central Bank's quantitative-easing program and hinting the bank would do little for most of 2017, its president is back in the spotlight amid an anti-European Union backlash across the region.

ECB officials extended their bond-purchase program by a longer-than-expected nine months in December to help counter potential volatility "relating in particular to shocks emanating from the political environment," according to minutes of their latest meeting published on Thursday.

Politicians in Germany, France, Italy and the Netherlands -- which all face general elections this year -- have recently stepped up attacks on the ECB, complaining it is doing too little, or too much, to support the bloc's EUR10 trillion economy. In all four countries, mainstream parties face pressure from euroskeptic challengers expected to grab a significant share of the vote.

While swaths of southern Europe stagnate economically, growth in Germany accelerated to a five-year high of 1.9% last year, and the nation posted a budget surplus for a third straight year, the first time that has happened in at least four decades, according to data published Thursday.

The gulf in economic prospects across the region, where unemployment rates vary from 23% in Greece to 4% in Germany, is fueling nationalist sentiment and creating a communication challenge for Mr. Draghi, who will face themedia on Jan. 19 after a regular governing-council meeting.

The ECB chief has pledged to "keep a steady hand" through a turbulent political year. But pressure will mount on Mr. Draghi to show his next move.

Investors will soon start demanding information on what the ECB plans after December, when its bond-purchase program is currently due to end.

Any indication that the ECB might extend, or even accelerate, its bond purchases would be red meat to the bank's German critics, including the populist Alternative for Germany party. But signaling that the stimulus could end risks roiling bond markets and driving up interest rates on southern European debt, fueling an anti-euro backlash in weaker economies like Italy.

"If the Federal Reserve hikes rates, that's bullish for the dollar" because it reflects the prospects of higher U.S. growth, said George Saravelos, chief foreign-exchange strategist at Deutsche Bank. "But if the ECB hikes rates, what happens to Italy? The ECB has no good options left."

When then Federal Reserve Chairman Ben Bernanke indicated in mid-2013 that the U.S. central bank would likely start tapering its own QE program, long-term U.S. bond yields jumped and the value of the dollar rose substantially, an episode known as the taper tantrum.

Renewed criticism of the ECB comes as the eurozone appears to be emerging from its yearslong economic torpor. Data published on Thursday showed industrial production in the eurozone rose by 3.2% in the year to November, up from 0.8% the previous month. Unemployment is at a seven-year low and the euro has fallen close to parity with the dollar, a boon for the region's exporters.

But a surge in eurozone inflation, to a three-year high of 1.1%, has sparked renewed criticism in Northern Europe, where politicians have long complained that low interest rates punish savers and let southern European borrowers off the hook.

Inflation is "guzzling our savings," a Frankfurt newspaper complained Sunday, picturing inflation as a red-eyed monster swallowing euro bank notes. Markus Soeder, an ally of Chancellor Angela Merkel, warned this month that ECB policies, combined with rising inflation, were "catastrophic" for German savers.

"The German economy certainly doesn't need a demand stimulus because we are almost at full employment," said Clemens Fuest, president of the Ifo Institute for Economic Research.

Elsewhere in the eurozone, criticism focuses on the ECB failure to revive sluggish economies.

French National Front leader Marine Le Pen, who is expected to make the second round of presidential elections in May, said recently she wants to yank France from the euro, complaining it is stifling growth.

Italy's economy minister Pier Carlo Padoan took the unusual step last month of criticizing the ECB's assessment of the world's oldest bank, Banca Monte dei Paschi di Siena, which has been ordered to raise almost EUR9 billion (around $9.6 billion) of fresh capital. Beppe Grillo's populist 5 Star Movement, which is polling close to 30%, has called for an Italian exit from the currency union, and said his nation is at war with the ECB.

"The Germans block everything...because of them, and only them, the periphery is kept caged in the euro," Mr. Grillo wrote in a recent blog post.

In a move seen as a nod to German concerns, the ECB said in December it would scale down its bond purchases to EUR60 billion a month from EUR80 billion after March. Several ECB officials opposed extending the program at all, according to the minutes. They include Jens Weidmann, president of Germany's Bundesbank and a vocal critic of QE.

But that move doesn't seem to have been enough. German bankers, economists and politicians have been lining up this year to demand an ECB course change. Mr. Fuest argues that the ECB should start winding down its bond purchases as soon as April if eurozone inflation hits 1.5%. The ECB aims to keep inflation just below 2%.

"Everybody in Germany is waiting for a signal of whether they are talking about an exit or not," said Marcel Fratzscher, president of German economic institute DIW Berlin.

Economists say the ECB is probably increasingly eager to wind down QE. The pool of available bonds is dwindling while concerns about negative side effects mount. One key option for expanding the pool of assets -- buying more than 33% of each bond issue -- could create legal and reputational risks, according to the minutes of the December meeting. Mr. Draghi has repeatedly urged governments to more actively support growth.

For now, any discussion of tapering looks premature. Mr. Draghi says the topic hasn't even been discussed by the ECB's governing council.

"It's still too early for the ECB to adjust its rhetoric," said Thushka Maharaj, a strategist at J.P. Morgan Asset Management in London. She pointed to stubbornly low core inflation, which excludes volatile energy and food prices. ECB officials expressed similar concerns at their December meeting.

Still, by March, investors are likely to start demanding more information about tapering, Ms. Maharaj said.

Some economists see a window of opportunity over the summer -- after elections in France but before those in Germany.

"Once they start talking about slowing purchases, markets will react violently," said Stefan Gerlach, a former deputy governor of Ireland's central bank who is now chief economist at BSI Bank in Zurich. "But the ECB has started to move the chess pieces. The mood music at news conferences will start changing."

--Nina Adam contributed to this article.

Write to Tom Fairless at

(END) Dow Jones Newswires

January 12, 2017 13:10 ET (18:10 GMT)

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