The ECB's moment of truth

The European Central Bank is widely expected to launch a controversial new bond-buying program at its first policy meeting this year on Thursday, soothing investors but annoying critics who see it as tantamount to letting governments off the hook for racking up too much debt.

Known as quantitative easing, the stimulus tool is widely regarded as a last-ditch effort by the ECB to spur growth in the eurozone and raise inflation to a level just under 2 percent.

The central bank has been trying hard to encourage lending to companies by lowering its key interest rates to near zero, but those cuts have not had the intended effect.

"Bond purchases are the last tool at the ECB's disposal," said Marcel Fratzscher, who heads the Berlin-based German Institute for Economic Research. "It can't issue any more credit to banks because the banks have received more than enough credit from the ECB."

Quantitative easing, modeled after a stimulus scheme imposed by the United States' Federal Reserve, would see the central bank buy up hundreds of billions of euros worth of government bonds to flush markets with freshly minted cash. The increased liquidity would put upward pressure on inflation.

Three scenarios

Mere talk of large-scale bond-buying buoyed markets this week, lifting European shares to seven-year highs as investors found their appetite for risk again.

But it's anyone's guess just how much new money the central bank will put into circulation. Market experts suspect it could be anywhere from 500 billion to 1 trillion euros ($578 billion to $1.15 trillion).

That uncertainty has kept some investors on their guard, although shares around the world have largely risen as most investors rejoiced at the prospect of more cheap money being injected into the economy.

Amid the speculation, experts have outlined three scenarios for Thursday's ECB meeting. First, the bank could announce that it will begin a new stimulus program and be forthcoming about the cost, saying it will bear the risk of such a move on its own.

Second, the ECB could call on national central banks to share some of the burden. The third scenario entails the monetary policymakers in Frankfurt saying they will begin buying government bonds but postpone revealing the scope of their purchases until later in the year.

A reason not to reform

Opponents of quantitative easing within the bank's governing 25-member council take issue with the fact that by selling bonds, governments in weaker countries are able to raise money without having to push through tough economic reforms that are unpopular with voters.

This week, German Chancellor Angela Merkel said whatever the ECB decided, it should not be seen as undermining efforts to improve public finances.

"The pressure to improve competitiveness in Europe must be maintained, otherwise nothing, absolutely nothing will help us," Merkel said.

When inflation in the eurozone turned negative last December for the first time in five years, concerns grew that the 19-member single currency bloc could be headed down a slippery deflationary slope.

The eurozone was at risk of becoming like Japan, some feared. That country has been ensnared in a period of severe deflation for years that it is still struggling to overcome.

Specter of deflation

Others, like the ECB's former chief economist Jürgen Stark, say such fears are overblown and accuse the central bank of exploiting fear of deflation and using it as a pretext to push through new controversial measures.

Stark worked for the ECB from 2006 until 2011, when he resigned in protest of unconventional policy decisions made at the bank. He told the German business daily Handelsblatt on Wednesday that the ECB "wants to drive down the refinancing costs of individual countries."

"That is very different from traditional monetary policy," he said.

Stark added that the ECB had already set itself the goal of boosting inflation long before eurozone-wide inflation turned negative.

But quantitative easing has its proponents outside of the ECB. It has been hailed as a success in the US, where the economy is improving.

"QE has been a big success in the United States and I think it's an essential element to get the economies out of recession and moving forward," said Ezekiel Emanuel, a former White House advisor who now works as a professor at the University of Pennsylvania. "I think the Bundesbank has been too conservative about trying to increase economic activity. [Quantitative easing] is one of the tools you have to use."