August 2, 2012
Last week, European Central Bank president Mario Draghi challenged investors doubting his determination to make the euro work. On Thursday, he launched a bold gambit in the eurozone’s game of chess with markets and elected leaders.
Far from moderating his forceful London remarks, Mr Draghi made clear that the ECB is ready to act to stop the disintegration of eurozone financial markets. In a significant step for the ECB’s interpretation of its own role, he left no doubt that the central bank considers it “squarely” within its mandate to counteract “convertibility risk” – the market effect produced by doubts that the euro will survive intact. Mr Draghi, in combative mood, declared that the euro is here to stay: it is “pointless” to bet against it – a big statement.
Within weeks the ECB will announce plans for buying government bonds – more transparently than before, in quantities it sees fit and only at short maturities. Mr Draghi was also explicit that the governing council may adopt other “non-standard monetary policy measures” should it consider it necessary to fix the dysfunctions in the financial markets.
None of this lets off the hook eurozone politicians or investors. Mr Draghi set clear and necessary conditions for ECB intervention: governments in trouble must press on with fiscal consolidation and structural reform, since monetary action cannot substitute for the hard work of keeping national economies compatible with currency union. And before central bank funds are unleashed to undo the cost of scepticism that the euro is here to stay, the countries in question will have to sign up to the eurozone’s rescue funds.