You have to admire Draghi, but this won’t save the useless euro
If the eurozone is to be saved, it will have to be by its political leaders - not its central bankers
AFTER nearly three years of non-stop crisis we have had so many plans to save the euro that it is easy to think one more won’t make much difference. Yesterday, though, it was the turn of Mario Draghi, the President of the European Central Bank, to step up to the plate, and expectations were high.
The markets, at least, were not disappointed. Unlike even mighty Germany, the ECB is the one participant in this troubled saga which really does have unlimited financial firepower. In theory, it could print enough money to buy enough bonds issued by the likes of Spain, Italy and Portugal to bring the European debt crisis to a halt, virtually overnight.
In the event the ECB did not go that far, but it got quite near. To bring the borrowing costs of the most troubled euro members back to affordable levels, the Draghi plan will, if necessary, provide a “fully effective backstop” to the single currency by pledging to buy unlimited quantities of troubled bonds.
The US Federal Reserve and the Bank of England have effectively been doing something similar since 2009. In terms of the euro, however, such a move is a breakthrough, not least because the laws governing the ECB are a great deal more restrictive than those for other central banks. That the plan passed the ECB board by 16 votes to one, despite all the legal obstacles along the way, was an added bonus.
But while the Draghi plan changes the game, it does not follow that it will necessarily save it. One sign of trouble ahead was that while 16 to one might sound like a thumping majority, the lone dissenter was the German Bundesbank president, Jens Weidmann.
Germany may have just one vote on the board like everyone else, but all its eurozone partners accept that it is very much primus inter pares. Nor are they under any illusions about its deep aversion to printing money, especially if it is to bail out profligate southern Europeans.
Thanks largely to Weidmann, the help that Spain, in particular, so desperately needs will come with strict conditions, in the form of more austerity supervised by outside inspectors as in Greece. For Spain, that may yet prove a humiliation too far. And even if the Spanish Prime Minister, Mariano Rajoy, swallows his pride and accepts intrusive Greek-style supervision, it could well prove self-defeating.
You don’t have to be an economist to realise that if the only way to lower interest rates is to shrink your economy ever further, when unemployment is already nudging 25 per cent, the game is unlikely to be worth the candle. Yet that is what Weidmann is determined to prescribe for Spain, and Draghi is apparently committed to administering.
The other big question mark is moral hazard. What happens if Spain or another country takes the ECB’s money but then refuses to stick to its agreed austerity programme? The ECB can paper over the cracks, and with enough money and determination it may be able to do so for some time yet. But it has never suggested that it can provide a lasting solution to a country’s debt crisis, let alone the wider political problems of the euro.
Yet the longer the crisis drags on, the more the politicians’ room for manoeuvre shrinks. Sometimes it seems as if the only thing the two sides of the eurozone still have in common is that both are paying a very high price for a currency that does not work.
In the solvent North, it is not just the Bundesbank that is losing patience, so are the voters across a swathe of countries stretching from the Netherlands right across to Finland. In the bankrupt South, they can’t take much more and their leaders know it.
One has to admire Mario Draghi. To get as far as he has, in the teeth of ferocious opposition from the German economic and political establishments, must have required huge diplomatic and legal guile. But with the best will in the world, the most that can realistically be hoped of his plan is that it will buy some extra time for Europe’s dithering and fractious politicians at long last to get their act together.
Beyond that it is hard to see what more he or the ECB can do. If the Eurozone is to be saved, it will have to be by its political leaders - not its central bankers.