The President of the European Central Bank, Mario Draghi, may not have saved the Euro this morning, but he has made the boldest effort yet to get on top of the crisis.
First let’s look at what he’s done. The ECB will now intervene in the markets to buy an unlimited number of bonds from countries like Spain and Italy, which should have the effect of lowering the interest rate that Madrid and Rome will have to pay to borrow new money. As long as this interest rate - the bond yield - isn’t too high, there should (he hopes) be time for both Governments to get economic reforms in place and deficits down and for all to be well with the world once again.
And it might work. It is not quite the ‘big bazooka’ that David Cameron has been urging them to unleash, but it’s certainly the heaviest calibre ammunition deployed so far. There are, though, some problems ahead, and none of them are trivial.
The German problem: the decision announced at the ECB today was passed by 22 votes to 1. There is no official word on the identity of the hold-out, but noone doubts that it was Jens Weiderman of Germany. Reports in the German press suggest that he wanted to resign in protest, but was talked out of it by Angela Merkel. The principal German objection is that the money to buy all these bonds doesn’t grow on trees, and the bill is likely one day either to be presented to the German taxpayer or to result in a big dose of German inflation. Both results, to them, are anathema.
The Spanish problem: Spain needs this help more than anyone at the moment. Madrid must refinance a massive €27bn of borrowing in October, and every week another of its regional Governments is coming cap in hand to Madrid asking for a bailout.
Spain is happy for the ECB to help out, but doesn’t want to accept the sort of conditions and supervision that have been imposed on Greece, Ireland and Portugal. Today Mr Draghi insisted that bond-buying will only happen if a country accepts both conditions and supervision. There is something of a stand-off between Spain’s Mariano Rajoy and the Bank’s Mario Draghi, and one of them is going to have to blink.
The moral hazard problem: if a country is in deep trouble it has little alternative but to take painful measures to get out of trouble. Unless, of course, someone comes to its aid. Give a Government a truck load of money and suddenly the incentive to make politically costly reforms disappears. This is why such strict conditions have been imposed on Greece in return for (so far) two bailouts.
But what happens when countries like Spain and Italy are so large that if they collapse they take everyone else down with them? It may well be that, a few months down the road, the only weapon the ECB has available against a Government back-sliding on reform is to threaten to bring down the whole Eurozone, and that is really no threat at all. No wonder the Germans are so worried about what is going to become of their money (see above).
As one leading German commentator put it this week, the Euro was meant to make the rest of the Eurozone like Germany, but in fact it is making Germany more like southern Europe. Is the new Eurozone mantra about to become “why reform when you can devalue?”
None of this will have any impact on Ireland, Portugal or Greece, who are specifically excluded from the bond-buying programme, and the problems of Greece will loom large once again in the next few weeks. But after many months of urging, the ECB has at last acted, and in a way that at least begins to reflect the size of the problem the Eurozone is facing. They have bought time, but that time will only be useful if it’s spent implementing reforms rather than dodging them.