ANALYSIS:The European Central Bank is poised to take a big step into the unknown – buying government debt from euro countries, writes ARTHUR BEESLEY
THE EU/IMF rescue plan for Greece was designed to extinguish doubt about its ability to repay massive debts.
The country has been saved from the abyss, at a huge cost to its people, but the brush with insolvency intensified anxiety that other euro countries would require aid.
As the leaders of the 16 euro zone countries descended on Brussels last night to take stock of the debacle, they met against the backdrop of mounting fear that the Greek crisis could go global. Their “unprecedented” deal to underwrite Athens to the tune of €110 billion was struck only last Sunday – an ad hoc solution to a gaping hole in the country’s finances.
The intervention, the first such rescue in the euro zone, was designed to puncture market pressure. But it did no such thing. Instead of calming fears, the plan was followed by a cascade of turmoil that sent world markets tumbling throughout the week.
Under most pressure were Spain and Portugal, whose heavy debt dependence has led to fears that they might ultimately need help.
Ireland, too, felt the force of pressure on its borrowing costs, which had declined as the Government undertook a series of painful austerity measures to regain control over the public finances.
From Berlin, Paris and Brussels the renewed turmoil met with predictable series of attacks on market “speculators”, who stood accused of ignoring economic fundamentals in their pursuit of profit. In the background, however, the disruption prompted yet another rethink.
Week by week, the European authorities have rewritten the rule book in their increasingly desperate efforts to halt the build-up of pressure over Greece.
Now on the cards is an even bigger step into the unknown, namely the purchase by the European Central Bank (ECB) of government debt from euro countries.
Such an initiative would immediately relieve pressure on countries that are heavily dependent on the private debt markets as they could raise funds from another source.
In essence it would be a form of quantitative easing, whereby the public authorities print money to help money flowing through the financial system.
In a currency union of 16 countries, however, it is laced with legal, technical and political complexity. The more money the ECB prints, for example, the greater the danger of undermining the very stability the bank is supposed to promote.
Given the scale of public indebtedness in the euro zone, hundreds of billions of euro could be involved.
In Lisbon on Thursday afternoon, ECB chief Jean-Claude Trichet said the bank’s governing council hadn’t even discussed the possibility of going down this route at its monthly meeting.
In the background, however, discreet discussions about exactly that eventuality were already under way.
Sources say Spain, Portugal and Italy are in favour of the plan. No surprise there, of course, for these countries have a voracious appetite for debt. But as always in this drama, much pivots on the response of German chancellor Angela Merkel.
She was deeply reluctant to involve Berlin in any bailout for Athens and is perceived to be equally cautious about encouraging a major expansion in the ECB’s remit.
This has its roots in Berlin’s historic attachment to tight management of the public finances. Giving the ECB power to buy government debt would be a step in the opposite direction.
But pressure is mounting.
For months, the European authorities have been buffeted by the Greek crisis, every initiative taken and every promise of support shrugged off as inadequate by markets who fear that the fiscal weakness of some euro countries is such that they might ultimately default on their obligations.
To illustrate their determination to avert the threat that the Greek crisis could be repeated, the European authorities have been talking for months about new measures to reinforce the central co-ordination of economic policy in the euro zone and toughen surveillance.
The notion works in theory. In practice, however, European governments have long flouted existing legal rules which bind them to fiscal probity and threaten them with fines if they go offside.
The rules were routinely broken, no country was ever fined and the European Commission’s push to strengthen the regime is riddled with fears that it would be politically impossible to enforce. What is more, the big fear is that it would be just another administrative tool with no real teeth.
Euro group leaders came to Brussels to draw a line under the Greek problem.
That, however, is proving very difficult to do.