May 14 (Bloomberg) -- European Central Bank policy makers clashed over the bank’s asset-buying program and prospects for a recovery less than a week after President Jean-Claude Trichet engineered a truce.

Vice President Lucas Papademos said in Vienna today that a recovery may come sooner than previously thought. Minutes earlier, Dutch council member Nout Wellink said economists shouldn’t get too optimistic about “green shoots.” That came a day after Germany’s Axel Weber and Slovenia’s Marko Kranjec reopened a split over the size of the ECB’s bond-purchase plan.

“The ECB Governing Council looks like a battlefield,” said Laurent Bilke, a former ECB forecaster who now works for Nomura International in London. “It would be simply ridiculous if we weren’t already in the middle of the worst recession in postwar history. But now it has more dramatic consequences. Trichet will have to restore some order.”

A split on the 22-member Governing Council this year has made it difficult for Trichet to send a clear signal on how the ECB will step up its fight against Europe’s worst recession since World War II. While he won support on a plan to purchase 60 billion euros ($82 billion) in covered bonds, a compromise on the program’s focus and scope may already be unraveling.

Kranjec said in an interview yesterday the ECB is likely to spend more than 60 billion euros, a figure that Weber insisted would be a “maximum.” The debate rumbled on today across Europe, with Slovakia’s Ivan Sramko saying nothing can be excluded and Executive Board member Jose Manuel Gonzalez-Paramo saying there’s no plan to expand purchases “at the moment.”

Clear Feeling

“It’s quite difficult to communicate a strategy when there’s such a big disagreement,” said Nick Kounis, chief European economist at Fortis in Amsterdam. “It’s difficult for financial markets to get a clear feeling of what the ECB is doing, why it’s doing it and what it’s going to do next.”

Trichet today declined to comment on the bank’s plans after a meeting with French President Nicolas Sarkozy in Paris.

Currency traders said the prospect of the ECB expanding its asset purchases was weighing on the euro, which traded as low as $1.3526 today from $1.3721 yesterday.

“The markets have begun to think there’s a possibility the ECB may commit to non-traditional steps,” said Hideki Amikura, deputy general manager of foreign exchange in Tokyo at Nomura Trust and Banking Co. “The euro is likely to be top-heavy.”

Unholy

On May 7, the ECB cut the key rate to a record-low 1 percent and Trichet said that it’s not necessarily its lowest level. He also announced the ECB’s unprecedented decision to buy covered bonds, securities backed by mortgages and public-sector loans which have suffered a slump in demand during the financial crisis. Details of the plan are to be unveiled next month.

“The decision was an unholy compromise which didn’t please anybody,” said James Nixon, an economist at Societe Generale SA in London.

The bond plan has so far failed to revive Europe’s 2 trillion-euro covered bond market as investors await more details. The bid/ask spread for five-year French obligations foncieres covered bonds, a measure of the cost of trading, has widened to 30 basis points from 20 basis points before the announcement, according to Barclays Capital.

Sales of the securities have dropped since the crisis worsened in 2008, falling to 48 billion euros this year from 102 billion euros a year ago, according to Bloomberg data.

The size of the ECB’s plan “is peanuts for an economy the size of the euro zone,” economics professor and former Bank of England policy maker Willem Buiter said at a conference in Dublin yesterday. “I expect they will announce more or that the recession in the euro zone will be longer and deeper than would otherwise be necessary.”

Flying Swallows

The Federal Reserve, Bank of England and Bank of Japan have already lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies in a policy some economists label quantitative easing.

Council members are also disagreeing about the outlook for Europe’s recovery. Papademos said that “the recovery may start sooner than previously envisaged,” while Wellink warned against becoming “too optimistic when you see a few swallows flying around or green shoots.”

Executive board member Juergen Stark later weighed in on the debate, saying Trichet is the only council member whose voice counts.

“At the end of the day the president is ‘porte parole’ of the governing council,” Stark said this evening in Berlin, using a French phrase meaning spokesman. “So listen to what the president says.”

Imposing Order

“Trichet should probably impose some order,” said Stephane Deo, chief European economist at UBS AG in London. “The deluge of conflicting messages is putting more volatility into the markets.”

In Europe, additional measures may come too late to soften an economic slump. The economy of the 16 euro nations will probably shrink 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S and the 4.1 percent slump in the U.K.

Some council members are trying to defuse the debate on asset purchases. Austria’s Ewald Nowotny said today the ECB has decided to buy covered bonds and “that’s it. No further options are of relevance now.” Wellink said the ECB’s message is already “precise and clear-cut.”

“The council has made its decisions and that’s it for the time being,” Wellink he said.

“These are very challenging times for everyone,” said Kenneth Wattret, senior economist at BNP Paribas in London. “The disagreements are more acute because we’re in uncharted territory. They’re uncomfortable in embarking on credit or quantitative easing, but the alternative, doing nothing, is even worse.”

To contact the reporter on this story: Simone Meier at smeier@bloomberg.net

Last Updated: May 14, 2009 14:48 EDT