Tuesday, August 7, 2012

This will not be enough, Mr Draghi

by Sebastian Mallaby

Financial Times

August 7, 2012

Financial markets, it has often been observed, are thin and volatile in August. Much the same can unfortunately be said for crisis management in Europe. The latest initiative from the European Central Bank has cheered markets. But it appears too qualified to be a lasting game changer.

The ECB has announced that it will resume purchases of sovereign bonds. In principle, this policy could salve the crises of peripheral Europe by reducing borrowing costs. But US experience teaches that there is all the difference between the shock-and-awe bond purchases pursued in the first round of quantitative easing and the tepid intervention of today. Mario Draghi, ECB president, has appropriated the shock vocabulary, vowing to do “whatever it takes”. But his true position is, “whatever it takes – maybe”.

To qualify for ECB support, countries must apply for a formal bailout, accept the attendant conditions and have their application approved by the rest of the eurozone, including fiercely austere Germany. Then, if they stay on track with the conditions, ECB bond purchases will supplement bond buying by the eurozone’s bailout funds. Mr Draghi is unspecific on the crucial question of how powerfully he would intervene. But one weakness is clear. Given that the crisis economies have a shaky record of delivering on reform targets, the ECB may be unable to sustain support under the conditions it has stipulated.


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