The ECB’s delay in offering a strategy for rescuing the eurozone adds pressure on Germany to clarify how far it is willing to go to revive Europe’s economy While Olympics fans watch athletes racing against the clock, Europe is facing an even more testing time trial of its own as economists and financial markets try to second-guess whether the euro will survive or, if not, how swiftly it will crumble.
After the recent promise made by Mario Draghi, President of the European Central Bank, to do “whatever it takes to preserve the euro. And believe me it will be enough”, bond yields in Spain and Italy – the two biggest worries after Greece – eased a little. Assuming the air of Gary Cooper in High Noon, Mr Draghi had sounded as if he not only knew that there was a problem, and how to fix it, but was also ready to step up to the challenge.
His plan of action was expected to be announced at yesterday’s policy-setting meeting of the ECB. Everyone, with that giddy optimism borne of desperation, was expecting him to deliver a miracle. In the event he announced no immediate measures to stem the eurozone’s debt crisis. What he offered instead was that the ECB’s Governing Council, “within its mandate to maintain price stability over the medium term … may undertake outright open market operations” and that it “will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission”. OK, but when? “In the coming weeks we will design the appropriate modalities for such policy measures.” So no miracle, then. Vague pledges to do something, sometime, possibly after everyone has returned suntanned from their holidays, is not what a waiting world regarded as fighting talk. Spanish bond yields briskly began marching upwards again. Suddenly Mr Draghi sounded not so much like a clear-sighted Gary Cooper as King Lear threatening his daughters that he would “do such things – What they are, yet I know not.”
But the world does urgently need to know what those things will be. Unlike the US, which has been trying to take its stalled economy by the scruff of the neck, the eurozone has lurched from crisis to crisis, like a drunk leaning on each passing lamppost for temporary support as he zig-zags in what he hopes is his correct direction home. Washington has chosen action over inaction and has made a commitment to spending its way back to economic vigor. It has opted to double up rather than to nickel-and-dime its way out of its mess.
Europe, by contrast, behaves as if it has all the time in the world, daring itself to hold its nerve as each new crisis looms. Its attitude reminds you of Douglas Adams saying how he loved deadlines because he liked “the whooshing sound they make as they fly by”. But the deadlines are coming faster, and the bills getting bigger. No sooner had the eurozone and Madrid thought they had bought themselves a breathing space by bailing out Spain’s crippled banks than fears grew that Spain itself might need a bailout; possibly of about €500 billion, dwarfing Greece’s initial needs.
No solution for the eurozone can be minted without the blessing of Germany, the ECB’s main shareholder.
But the Bundesbank has already warned the ECB not to overstep its remit. Germany bridles at having to foot the bill for feckless neighbours who live beyond their means. It sees moral hazard in signing bailout cheques that may blunt these debtors’ appetite to reform their economies. At the same time, there is a growing acknowledgement that austerity has its limits; that too rigorous pruning can leave an economy lifeless.
So far, a German-designed, EU-wide austerity programme has not made things much better. Often it has made things much worse. Germany’s distaste for bailing out Mediterranean neighbours is understandable, but may no longer serve its own economic interests. Germany would not be spared if the euro implodes. Berlin feels that it is being asked to pay too much. Inaction that results in a stagnant eurozone may cost it more still.
7th August 2012
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