The European Central Bank buildingJOHN MACDOUGALL
With both words and deeds, the European Central Bank is ratcheting up pressure on euro zone governments to bolster their response to the bloc's sovereign debt crisis and leave it to focus on fighting inflation.
The ECB has long been lobbying euro zone governments to do more to solve the bloc's debt troubles, but last week the bank dispensed with the small talk and made it clear that it would not keep interest rates artificially low to help the situation.
"The position of the Governing Council is that an increase in interest rates at the next meeting is possible," ECB President Jean-Claude Trichet said last Thursday.
The words that are likely to have sent a shiver from Athens all the way around the euro zone's periphery came just before a string of European ministerial and leaders' meetings in the coming weeks that will shape the future of the single currency.
"The signal for a pre-emptive hike has as much to do with politics as it has to with inflation," said Deutsche Bank economist Mark Wall.
"As Trichet explained, the ECB has been calling for a quantum leap in economic governance reforms but they are clearly disappointed with the response (from politicians) so far."
ECB policy makers are also keen to drop the bond-buying program they reluctantly began last May and are gently but assertively pressing euro zone leaders - who meet on Friday - to take on more of the burden in tackling the debt crisis.
The bond buying has led to accusations that the ECB is blurring the lines that define its role by entering the realm of fiscal policy and coming dangerously close to the ultimate taboo for the bank of financing governments.
It has also left it with an exposure to periphery debt, creating perhaps an unhealthy stake in developments.
Tellingly, the ECB bought no government bonds last week, pausing the program ahead of this Friday's euro zone summit despite the ongoing upward march of Portuguese debt yields which have hit euro-era highs this week.
"It clearly is moving towards (the ECB saying) 'we will only buy bonds if it is really necessary' ... if there is just a general creeping up of Portuguese bond yields and not a crisis, then it's up to you EU leaders to come up with something," said Berenberg Bank economist Holger Schmieding.
The ECB's reluctant program has seen it accumulate €77.5 billion in bonds so far, but its recent inaction adds to the pressure on euro zone leaders to step up their crisis response, with Portugal's Treasury Secretary warning his country's borrowing costs are not sustainable.
On Friday, leaders will discuss a "competitiveness pact," a deal Germany and France are pushing the rest of the bloc to adopt to show their commitment to overhauling their economies.
They are also hoping to agree at a March 24-25 summit on a "comprehensive package" they hope will draw a line under the debt crisis, part of which includes trying to improve EU budget rules to avoid a repeat of the debt crisis.
The ECB is pressing them to come good on both fronts, an outcome that would bolster the government response to the crisis and allow the bank to unwind its emergency efforts and focus on its main role of keeping inflation in check.
In addition to freezing their bond purchases and waving the threat of higher interest rates at politicians, ECB policy makers are using blunt rhetoric to press their case.
Somewhat lost amid all the tumult surrounding his rate rise signal last week, Mr. Trichet made a startling call on Europe's parliamentarians.
Having already criticized last year's Franco-German deal that watered down planned reforms, he urged the European parliament to revert to the original plan of making debt rules more automatic.
He has not been alone in speaking up.
On Tuesday, Bundesbank chief Axel Weber warned the ECB's non-standard policy measures - including the bond-buying program - "have long-term stability risks," and said the recent blurring of the lines between the central bank's and governments' roles needed to be reversed.
"We need to find that new distance," Mr. Weber said. "I think the ECB has made perfectly clear that this is a first step in that direction: that we will find a new distance to fiscal policy in Europe because it's not our responsibility."
Collectively, these interventions mark a hardening in the bank's tone towards euro zone leaders, with whom Mr. Trichet worked closely to fight the debt crisis in its early stages.
"There is probably a weakening of that strong and unusual co-ordination exercise," said RBS economist Silvio Peruzzo.
However, as Deutsche's Mr. Wall pointed out, the ECB has not reneged on its promises to politicians and continues to prop-up hard hit parts of the euro zone with its crisis measures.
It will carry on providing unlimited funding for banks in all its lending operations for the next three months and keep on offer in its weekly and one-month operations, until at least mid-July.
Berenberg's Mr. Schmieding said extending limit-free three-month liquidity operations, which surprised some in the markets, showed the ECB was still ready to help peripheral euro zone countries struggling with the debt crisis.
"I don't take it as a rigid 'we are out of this and it's all up to you (EU leaders). More it is a case of 'we are doing our bit but we definitely expect you to do your bit as well'.
"If contagion risks were to get much worse, the ECB would probably still step in and buy bonds," he said.