The European Union’s 19th crisis summit was winding down when European Central Bank President Mario Draghi made an unusual request. He wanted some alone time with EU President Herman Van Rompuy to thank him for charting the path toward a shock-proof Euro zone.
Only later did the significance of the blueprint sketched out at the June summit in Brussels emerge. The commitment to tighter bank supervision, budget coordination and a nebulous “political union” was instrumental in persuading Draghi that governments are putting the currency on a sounder footing, leading to yesterday’s ECB decision to buy bonds to help them get there.
“We need two legs,” Draghi said in presenting the new tactics. “Governments have to undertake the policy reforms. There is no intervention by the central bank, by any central bank, that is actually effective without concurrent policy action by the governments.”
Crisis management
While it relaunched the crisis management after two-and-a-half years of trial-and-error and bickering between creditor and debtor governments, the ECB’s strategy bore traces of the compromises and half-measures that continue to gnaw at the currency union. The next moves are out of the bank’s control. They depend on decisions in places like Madrid and Rome. And, the leaders of the 17 governments locked into the supposedly unbreakable euro don’t yet have a roadmap for remaking Economic and Monetary Union, only a pledge to come up with one.
Like much of the anti-crisis diplomacy since a newly elected Greek government woke up to a euro 20-billion ($25 billion) cash shortage in October 2009, the ECB announcement amounted to a work in progress, at risk of lagging behind the breakneck speed of financial markets.
For now, investors were encouraged.
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‘Fully signed up’
Political leaders and central bankers have “fully signed up to some kind of medium-term United States of Europe,” Jim O’Neill, chairman of Goldman Sachs Asset Management, said in a Bloomberg Television interview in London yesterday. The ECB is “telling us the markets should not keep worrying about the risk of a euro break-up and we will do things to enforce that reality.”
As recounted by European officials, the origins of the ECB’s move lay in the sleepless summit at the EU headquarters on June 28-29. The arrival of Socialist Francois Hollande as France’s president shifted the balance of power, diluting the austerity-first recipes preached by Chancellor Angela Merkel of Germany, the euro area’s largest economy and chief backer of euro 486 billion in emergency loans so far awarded to Greece, Ireland, Portugal and Spain.
With the broader economy slipping toward recession, Hollande’s pro-growth push found a ready audience, even in Germany. A “compact for growth and jobs” was quickly approved, featuring euro 60 billion of additional lending by the EU’s investment bank.
The rest of the meeting didn’t go according to plan. Breaking with his predecessor Nicolas Sarkozy’s fealty to the German agenda, Hollande supported pleas by Spain’s Mariano Rajoy and Italy’s Mario Monti for immediate relief from runaway borrowing costs.