Eurozone crisis: From deutschmark to lira?
- 7 September 2012
- From the section Europe
Is Thursday's announcement from the European Central Bank a turning point in the eurozone debt crisis?
Some investors clearly think so. The key word in the announcement was "unlimited". The central bank will do whatever it takes to keep the borrowing costs of vulnerable countries down. That is what makes this bond-buying plan different from what came before.
The markets have applauded. Finally, in their view, the ECB is acting as the bank "of last resort". It has become the "fully effective backstop to avoid destructive scenarios".
The objections of the German Bundesbank have been brushed aside. The bank's president, Jens Weidmann, was left to issue a statement that he regarded the bond purchases as "tantamount to financing governments by printing banknotes".
That is now the charge that has been laid on the table: that the essential character of the bank has changed.
Mr Draghi, the president of the ECB, was asked at his news conference whether, in effect, the ethos of the bank was now more "lira" than "deutschmark".
Of course the bank insists it is operating within its rules but they have become more flexible. I noted that the French finance minister said that saving the euro was part of the bank's mission. That certainly gives the bank plenty of flexibility.
So all eyes turn to Spain and Italy, two countries that were regarded as too big to bail out.
This new ECB programme is designed to help keep their costs down. If they decide to ask for help they will have to approach the eurozone's bailout fund and ask it to buy their bonds at auction. That would enable the ECB to spring into action and buy bonds on the secondary market until it was satisfied it had pushed down borrowing costs far enough.
"Strict conditions" will be attached to requests for help from the bailout fund but who will judge how strict they are? Will they be similar to the bailout programmes that Greece, Ireland and Portugal operate under? Or will this be bailout lite?
The IMF will monitor any agreement. One of the least convincing parts of the Draghi plan is that countries who backed off on their commitments might find the ECB stops buying their bonds. That would only expose a country to punitively high borrowing costs, triggering a crisis that this plan is designed to avoid.
Spain will be under pressure to ask for help. It needs to cover 30bn euros (£24bn; $38bn) in debt repayments in October. But Madrid is not ready to jump. Since the ECB announcement it has already seen its borrowing costs fall. Senior Spanish officials are wondering whether the mere existence of the ECB plan may be enough for them to avoid having to use it.
The key for Madrid is to avoid any rescue that comes with further conditions. The government will fight very hard not to end up with a full bailout programme.
The Deputy Minister for Trade, Jaime Garcia Legaz, was making the case that Spain did not need extra help. He said that exports to countries outside the eurozone were growing fast. Wage competitiveness was returning, as was a current account surplus. There was, in his view, enough good news to justify a pause before seeking a rescue.
This is an important moment in the eurozone crisis. The ECB has played its strongest card. It will certainly buy time. It should be remembered, however, that the eurozone economy will deteriorate further in the months ahead and that will once again challenge most of the assumptions that a corner has been turned.