Huge Step Taken by Europe’s Bank to Abate a Crisis
By Jack Ewing and Steven Erlanger, NY Times, September 6, 2012
FRANKFURT—The European Central Bank on Thursday took its most ambitious step yet toward easing the euro zone crisis, throwing its unlimited financial clout behind an effort to protect Spain and Italy from financial collapse.
Mario Draghi, the president of the central bank, won nearly unanimous support from the bank’s board to buy vast amounts of government bonds, a move that would relieve investor pressure on troubled countries but also effectively spread responsibility for repaying national debts to the euro zone countries as a group.
The decision propels political leaders farther down the uncertain and winding road toward a Europe with centralized control over government spending and economic policy, instead of a collection of nation states that sometimes seem to share little more than a currency and a slumping regional economy.
Mr. Draghi demonstrated once again that he may be Europe’s most powerful leader, perhaps the only one capable of brokering an accord among politicians whose national concerns and mistrust of one another have allowed the crisis to boil for two and a half years.
But there is a risk once again that monetary policy is moving faster than political leaders are able to create the institutions, such as a European bank supervisor, needed to ensure the survival of the common currency.
For the central bank itself, the pledge on Thursday to buy bonds from sovereign states, in conjunction with a fund financed by governments in the 17 European Union nations that use the euro, is a major evolution from its original narrow mandate to restrain inflation.
The bank and Mr. Draghi had the quiet support of all European leaders in taking this latest action, aimed at keeping bond speculators from driving Spain and Italy into budget-blowing borrowing costs. “The euro is irreversible,” he repeated several times Thursday.
Angela Merkel, the chancellor of Germany, voiced her approval during a visit to Spain on Thursday—a crucial victory for Mr. Draghi. But among German political leaders and citizens, widespread fear remains that they might some day wind up paying the bill if any country defaults on debt held by the central bank.
The bond-buying plan immediately reduced the financial pressure that had been building on Spain and Italy, even though those countries have not sought protection. The effective interest rate on Spanish 10-year bonds fell below 6 percent for the first time since May, and the corresponding Italian bond fell below 5 percent for the first time since April. American and European stock indexes also rose.
The central bank’s program will not solve the deep structural problems of the euro, Europe’s common currency. But it will buy time for the political leaders of the 17-nation euro zone to follow through on their past promises to discipline each others’ spending more closely and work harder to relax labor regulations and barriers to business creation that are regarded as impediments to growth.
“It takes away from the table an important risk in the short term,” said Lorenzo Bini Smaghi, a former member of the European Central Bank’s executive board. “Now I think the ball is in the hands of the governments.”