September 6, 2012
European Central Bank President Mario Draghi has announced his much-anticipated bond-buying plan. The short version: The bank will purchase sovereign bonds on the open market in unlimited quantities, but only after troubled countries request the aid and agree to fiscal conditions that other euro-area governments would impose.
It’s not the shock and awe we called for, but it is an important move and could relieve the financial pressure on Spain, Italy and other distressed euro-area governments. However, we have a few reservations.
Before we get to them, give Draghi some credit for pressing on with his plan over the opposition of Germany’s Bundesbank. Give Draghi credit, too, for the fact that his diagnosis of the problem is mostly correct.
The price of Spanish and Italian debt had begun to reflect not just solvency concerns but also the fear that the euro system might unravel. Guaranteeing the integrity of the currency system -- which is how Draghi rationalizes his plan -- is a proper and reasonable role for the ECB.
Draghi was also right to say that the ECB’s interventions would be “unlimited.” An arbitrary ceiling would have given the markets a target to shoot down. A similar logic applies to his decision not to announce a formal cap on borrowing costs for countries whose bonds the ECB will buy. That would have failed the credibility test and been one more hostage to fortune.