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Desperately seeking Mario

2 November 2011 By Pierre Briançon

If this had been just another week in the euro crisis, the European Central Bank may have had grounds for preferring continuity over change at its first meeting chaired by Mario Draghi. But Greece has thrown the euro zone’s future into question, and a series of disturbing numbers points to a recession that might not even spare Germany. The ECB should lower interest rates and signal that it will continue buying sovereign bonds for as long as it sees fit. The odds are it won’t do either, making the meeting a missed opportunity.

Data released this week show that the downturn in the euro zone will be more severe than thought. And German unemployment is on the rise for the first time since early 2010. True, inflation at 3 percent is significantly higher than the ECB’s target of “below but close to 2 percent”. But it should ease in coming months. And the ECB’s relatively high key rate of 1.5 percent hurts weaker euro members like Spain or Portugal, where variable mortgage rates are the norm. Meanwhile, it keeps the euro too strong for exporters’ comfort. The ECB may not want to contradict itself after raising rates twice this year. But if pragmatism trumped principles, that’s the decision it would take.

Then there’s the bond-buying programme the ECB reluctantly embarked on in August to limit the effects of contagion in Spain and Italy. The official line is that these purchases are temporary, because the euro zone bailout fund will soon take over that responsibility. But the mere possibility that the latest euro zone plan might unravel should give the ECB an opportunity to admit it is in the sovereign bond market for good, while insisting that bond buying is only targeted at countries intent on helping themselves through serious reforms. German opposition to the programme will not abate, and Draghi would prefer a unanimous council for his presidential debut. But unanimity isn’t a must when times call for tough choices.


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