Draghi has finally won his battle with the Bundesbank to prevent the likes of Italy and Spain being bankrupted or driven out of the euro by winning the power at yesterday’s ECB meeting to buy up their bonds in unlimited amounts. That’s what the markets have been waiting for for ages.
But there is a catch. Before the ECB will act, a country must have put in place its structural adjustment programme offering ‘strict and effective’ conditions before the buying up of the bonds of the distressed countries can begin. But then what would happen if the ECB used its firepower to bring down the interest rates of these countries, but then the government found the conditions it had signed up to were too difficult to implement because of popular resistance?
In other words, the Draghi-ECB solution is dealing with the symptoms of the problem, not the real causes. The core of the problem is not to shell out unlimited funds to buy up the bonds of eurozone’s competitive failures, but to address the reasons for the competitive failure in the first place. Yet it is impossible to do this within the straitjacket of fixed exchange rates and fixed interest rates, and that is why the euro still remains ultimately unsalvageable.
Nor is the Draghi plan a sufficient response to the immediate problem of a sizeable part of the eurozone steadily slipping into deep recession and dragging down even the more powerful countries (including Germany) with them. If Greece, Spain and Italy are to be assisted to survive ‘come what may’ by deep ECB pockets, it’s difficult to see what ‘strict and effective’ conditions they can offer in their present condition which their electorates will wear.
As always, the bankers offer an umbrella in the summer when it isn’t needed, but when the storm is raging in the winter and the umbrella desperately needed, they always find reasons why it’s not available.