Did Mario Draghi, president of the European Central Bank, announce a big change in monetary policy in his widely reported speech last week? Or was he misunderstood? The financial markets at first hailed a breakthrough. Now doubts have set in.
We’ll know more after Thursday’s meeting of the ECB’s governing council. The euro’s future may turn on what that body decides. Draghi has raised expectations and it’s important that he meets them. If he does, Europe will be taking a big step toward recovery, albeit only one of many that will be needed over the coming months and years.
If the markets decide his bold new departure meant nothing after all, brace yourself. Europe’s financial crisis is about to get worse. Draghi’s pledge that the ECB “is ready to do whatever it takes to preserve the euro” seemed clear enough, and what splendid news that was. Finally, the ECB is willing to act as lender of last resort to Spain and other distressed sovereign borrowers. Draghi wants to revive and extend the bank’s dormant bond-buying program, and he’s pressing Europe’s governments to let him get on with it.
The speech as a whole, though, was ambiguous and puzzling. Parts were barely intelligible. You could read almost anything into what Draghi said. Even the crucial phrase began with the words “within our mandate.” That’s a problem. The ECB isn’t sure from one day to the next what it is required or allowed to do, and the euro area’s governments are divided on the point.
Still, Draghi was offering a rationale of sorts for the ECB to step up its interventions and cap the interest rate that struggling governments are forced to pay their lenders. With the bank ready to act, the next thing was for euro-area governments to decide they have the political cover they evidently think they need, and choose to let it happen. In the first response to Draghi’s comments, they seemed willing. The German chancellor, Angela Merkel, and France’s president, Francois Hollande, made a joint statement, which, though vague and noncommittal, read like an endorsement. They, too, vowed to “do everything to protect the euro area.”
Then the Bundesbank, the ECB’s biggest shareholder and an important political actor in Germany, said it remained opposed to resuming large-scale bond purchases. Speaking for many fiscal hardliners in Europe, the former guardian of the deutsche mark thinks it’s vital to keep up the pressure on highly indebted governments to cut their borrowing and reform their economies.
Europe’s limitless capacity for disagreement and vacillation isn’t its biggest liability right now -- the underlying fiscal problems are grave, and the single-currency system has locked in huge disparities in competitiveness between the core and periphery. But the deep confusion over what policy makers intend sure isn’t helping.
This pattern keeps repeating. The recent summit meeting of euro-area leaders made modest but useful progress. They decided in principle they would work toward a so-called banking union, and that help for distressed banks would go directly to institutions rather than through governments (a change that avoids adding to public debt). Good ideas. Financial markets were thrilled. Almost immediately, governments undid the benefit by disagreeing over what they’d agreed to do. Investors decided nothing had changed, and borrowing costs in Italy and Spain -- critical indicators of the euro area’s prospects -- surged to records.
In monetary policy, credibility is all, and that’s never more true than when managing a crisis. Expectations can be stabilizing or destabilizing, and the difference rests mainly on whether government and central bank pronouncements are understood and believed.
Doubts and disagreements can’t just be waved away, I know, but at the very least Europe’s policy makers need to understand the harm their squabbling is doing. Their failure to pull together is making a bad situation much worse.
The cost isn’t limited to the immediate financial consequences. A clear commitment that the ECB will intervene with bond purchases -- “whatever it takes” -- can put a ceiling on borrowing costs for Italy and Spain, and avoid their becoming insolvent. That’s a necessary first step.
Beyond that, however, the euro area will need new fiscal arrangements that balance pooling of risk, automatic fiscal transfers when economies diverge, and strong incentives for fiscal responsibility. There are many different ways of doing this. A “fiscal union” could be more or less ambitious. As I’ve previously argued, it needn’t mean more political integration overall -- and it would be better if it didn’t.
Designing this new system won’t be easy, but the job will be impossible without a renewed sense of solidarity. That’s the biggest cost of the recent disarray over policy. The quarrelling worsens the crisis, national resentments grow and the likelihood of cooperation shrinks.
Berlin has a particular responsibility in all this -- not least because Germany has gained so much, and has so much to gain in the future, from the European economic project. Its government, responding to domestic public opinion, is the main defender of the view that the pressure must be maintained on feckless countries such as Greece and Spain. Now that Draghi is apparently ready to take bolder action, Merkel and her ministers are the main obstacle to a more effective phase of ECB policy.
Germany’s government needs to tell itself, and the country’s voters, that Europe’s distressed sovereign borrowers have already tightened fiscal policy severely. To widely varying degrees, Greece, Spain and the others have longer-term debt problems that still need to be addressed, but in every case the short-term fiscal squeeze has been ferocious. Remember, these are economies in recession with very high unemployment. The International Monetary Fund, as fiscally orthodox as they come, just called on Spain to make its fiscal adjustment “less front loaded.”
Germany wants Greece, Italy and Spain to suffer for their lack of foresight? They already are. It wants them to change their fiscal ways? They have. Enough is enough. Declare victory for German standards of fiscal housekeeping, and let Draghi and the ECB start doing what they should have been doing for months.
(Clive Crook is a Bloomberg View columnist. The opinions expressed are his own.)
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