Frankfurt finds a better way

 

‘THE EURO is irreversible.” Certainly, if the European Central Bank has anything to do with it. That was the determined and welcome message to anxious and volatile markets from ECB President Mario Draghi yesterday in Frankfurt. Don’t bet against us, he was saying. Last week he promised “whatever it takes to preserve the euro. And, believe me, it will be enough.” Now he has delivered, though hardly with that promised degree of finality or the alacrity most would have hoped for, and notwithstanding vocal German reservations ahead of time. Markets responded with small declines as the limited nature of the ECB announcement sank in.

HE may have disappointed France and Italy in ruling out granting the European Stability Mechanism (ESM) a banking licence to increase its firepower by allowing it to borrow from the ECB. However, the widely expected promise that the latter will “undertake outright open market operations of a size adequate to reach its objective” to reduce the cost of overpriced bonds is most welcome. Albeit, only in September at the earliest, and after member states activate the ESM and its predecessor the European Financial Stability Facility (EFSF), to do likewise first. And Draghi’s promise to “consider undertaking further non-standard monetary policy measures according to what is required to repair monetary policy transmission” was also welcome.

The language is the usually opaque terminology of central bankers, but the message is clear: the ECB, acting with the ESM and EFSF, sees the need to use the collective weight of the 17 euro member states to resume buying stressed bonds, Spanish or Italian or others, to bring their cost down to manageable levels. Some work still needs to be done, however, to bring the Bundesbank on board. And the ECB will consider other monetary measures like quantitative easing – some call it “printing money” – if other measures are not working. Business will also be relieved that euro zone interest rates are to be maintained at their record low of 0.75 per cent.

The bank has gone some way to meet sceptics’ concerns that cheaper credit for the wayward will simply create “moral hazard” – any ECB bond purchases will only come at the request of euro states which have accepted strict “conditionality” and supervision. The logic of the memorandums of understanding that govern the lives of the bailout states is extended to all the vulnerable countries.

Yet, even if half-hearted, and only temporary band-aids that do little to deal with fundamental problems of deficits and indebtedness, the decisions taken by the ECB yesterday reflect an important acknowledgment by the majority of its governing council that the road out of the current mess lies only through solidarity between member states. Disappointingly, that conviction that this is not charity but enlightened self-interest is still not shared by German voters, the Bundesbank, and Chancellor Merkel, although the country’s partners would plead with some justice that they have gone the extra mile required in approving the fiscal treaty. Berlin still shows little sign of turning.

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