Europe's bank promises to rescue ailing economies, but with strings
European Central Bank President Mario Draghi announced that the ECB would buy the bonds of ailing eurozone nations. But the plan's success turns on conditions that have yet to be spelled out.
Today in an announcement watched around Europe and the world he said the ECB is ready to buy in "unlimited" quantities the bonds of ailing eurozone nations, though subject to a “conditionality" that remains to be spelled out.
Saying that Europe's overall economy is expected to shrink for at least another year, Mr. Draghi said the ECB plan should give eurozone nations in crisis time to put their houses in order.
The announcement followed a key meeting of the bank's governing council in Frankfurt, and was taken as good news in Greece, Spain, and Italy, now reeling under debt in the most significant financial crisis here in decades.
Draghi reaffirmed the commitment of the council to Europe’s single currency at a time when markets are pushing heavier borrowing costs on ailing nations in anticipation that they may default or leave the eurozone.
The affable and unelected chief banker has found himself in the midst of what has become not just an economic crisis, but a widening political crisis over whether Europe, the EU, and the eurozone can hang together.
Yet the summer has been a somewhat tranquil period here with fewer euro crisis headlines, and the ECB would like to keep it that way, even as Greece and Spain face high unemployment and drastically reduced government spending.
Draghi repeated nearly verbatim his now famous statement from last summer that “we will do whatever it takes, within our mandate to… preserve the euro… we say the euro is irreversible.”
The ECB’s direction under Draghi has been contested around Europe, mainly from northern states and Germany, where recent polls showed his unpopularity rating at 42 percent.
Yet in a nod to Germany, which fears the ECB will become an irresponsible money printing machine, the buying of one- to three-year bonds will be tied to what Draghi stressed as the linchpin of the plan: "conditionality." Draghi said the bond plan is a “fully effective backstop” – provided nations live up to the terms of the deal he stated.
That “most of the ECB is supporting this is positive, and it isolates Germany further,” says Simon Tilford, chief economist of the Center for European Reform in London. “But there are fears that the conditions attached to the bond buying will make it impossible [for debtor nations] to meet the terms. Tighter demands for austerity at a time of high unemployment may not be possible.”
Indeed, details of “conditionality” were not laid out by the central banker, probably in anticipation of an expected ruling by the German constitutional court in Karlsruhe next week. The court is expected to weigh the legality of bailouts, and a negative ruling would throw Europe and markets into uncharted territory.
EU leaders offered today an unusual show of diverse support as Germany’s Angela Merkel met with Spain’s Mariano Rajoy in Madrid, while Italy’s Mario Monti hosted EU commission chief Jose Manuel Barroso in Florence, and France’s François Hollande confabbed with Britain's David Cameron in London.
Draghi said the 32-member ECB council agreed to the plan with only one dissension, and addressed rumors that the outcome was skewed by sympathy in the council towards southern Europeans. “It’s not a southern cabal or an Italian thing,” said Draghi, himself an Italian.
Whether Draghi and the ECB have either oversold themselves, or have been oversold as saviors in the press, remains a question, Mr. Tilford says.
“There is a risk of people seeing this ECB action as a game changer. It may appear the ECB is doing all that is necessary, but that's getting ahead of the game,” he says. “This is not shock and awe, it is not the ECB flooding the market with capital like the Fed or the Central Bank of London, and dispelling all the convertibility risk."
"Convertibility risk" refers to the chance that the euro will eventually break apart back into drachmas, liras and so on, trapping bond holders in a weaker currency.
Today’s ECB announcement is the latest in a series of actions by the EU to staunch a crisis that dates to a bailout of Greece in the spring of 2010. EU leaders have met 19 times since Greece announced its books had been cooked for years and it was on the verge of insolvency.
Nicknamed “Super Mario” in some quarters, Draghi has been widely seen outside of Germany as one of few heroes of the euro crisis. He took over the reins of the central bank last year and immediately uncorked some 1.5 trillion in loans to European banks.
This July he did nothing to belie his reputation, saying the ECB would go to any length, “do whatever it takes,” to save the euro.
The ECB’s efforts are seen in many quarters as adding necessary glue to a monetary union that has been criticized as incomplete, since the EU does not have a fiscal union that would allow for transfers of funds, as featured in nations like the US, Japan, and the UK, which have federal treasuries or central banks that print money, and have fiscal unity that means, for example, that individual states or provinces can be easily aided by the federal center.