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Hard for now

22 November 2011 By Pierre Briançon

Everyone is a back-seat central banker in the euro zone these days. Well-wishers are flooding Mario Draghi, the new president of the European Central Bank, with advice on how to rid the world of its misery. French government officials have joined the chorus, insisting that the ECB should be “part of the solution” to the euro crisis. So far the ECB is sticking to its longstanding line – it is up to governments to sort out the mess they created. Germany agrees. This doesn’t mean it is on a collision course with France. A deal could even be in the works.

Draghi is in no hurry to follow the new market fad – “quantitative easing”, the indiscriminate buying of euro zone sovereign bonds. If the goal is to fight off recession, bond-buying is not a priority. The ECB still has conventional monetary ammunition; it can and probably will next month cut its key interest rate, from the current 1.25 percent. If the goal is to restrain euro-linked panic and ward off market chaos, the ECB is already buying Spanish and Italian bonds. So the only question is whether it should formally announce that the programme will be more systematic, and backed with the bank’s unlimited resources.

Nothing prevents the ECB from doing more. Its purchases can cap yields. But hesitation is a good way to keep the pressure on governments to make credible economic reforms. It will rightly wait for tangible signs of credible commitments, or even greater investor panic, before acting more forcefully. But when the time comes to act, the ECB is unlikely to be stopped by the German government’s reluctance or the Bundesbank’s explicit opposition.

Like the ECB, both Paris and Berlin want to salvage plans to beef up the euro zone bailout fund. And Angela Merkel is keen on ensuring that tighter fiscal discipline is enshrined into the EU treaty. If the French go along with her demand for stricter rules, and once she is reassured that a similar crisis is unlikely to happen again, Merkel could be persuaded to keep silent if and when the ECB tries to avoid a crisis from turning into a nightmare.


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