The president of the European Central Bank declared a few weeks back in London that he would do “whatever it takes” to save the euro.
Today, in one of the most keenly anticipated announcements from the bank in its history, he revealed a plan to try to bring the borrowing rates in troubled parts of the eurozone back towards more normal levels, stabilizing a situation which had threatened to explode.
Investors have been demanding very high rates of interest to lend to governments of countries like Spain and Italy to compensate for the risk that they might default on the debt. The ECB’s plan is to step in to buy large tranches of that debt themselves which will have the effect of lowering the interest rates from unsustainable levels.
But one country voted against the action today. We don’t know for sure, but it was almost certainly Germany which has been a vocal critic of the plan, partly because it runs the risk of boosting inflation, but more importantly because once the rates come down it takes the pressure off governments to impose reforms which the Germans think are necessary for a long term recovery.
To counter the second objection the ECB will insist on tough conditions before diving in to help. Essentially this means more austerity and those reforms which the Germans are so keen on.
For a government to ask for help, to agree to these conditions and also submit to inspections to make sure they are on track would be seen as a humiliation and a loss of sovereignty. The Spanish government is especially wary of taking this step but may eventually be forced to agree.
This is the third time the ECB has announced a bond-buying scheme and it has attempted to remove flaws in the earlier programmes.
In many ways it has succeeded: this is a powerful tool to reduce the borrowing costs but there are still some problems which will limit its effectiveness, related to the way the ECB will be trying to avoid the other German objection – the threat of inflation.
And the German central bank is still not happy – as I write this blog post, the Bundesbank is repeating its concerns of the distorting effect of the policy.
Furthermore, this is only half the story. Mr Draghi has delivered an unorthodox means of tackling the immediate problem but it’s now down to politicians to come up with long-term solutions which can end the crisis and return Europe to growth.
Overall, investors have welcomed the news and borrowing costs in Italy and Spain have fallen sharply today while share markets have rallied across Europe. Mario Draghi appears to have put the immediate fire out, but like the forest fires which blighted Spain this summer, they can reappear with worrying speed.