It’s crunch time for EU leaders and the European Central Bank (ECB). The ECB under the helm of Mario Draghi is steadfastly refusing to provide further assistance to the Eurozone periphery either directly via lower interest rates or securities market purchases or indirectly via another Long term refinancing operation (LTRO) . Any prospect of debt monetization as carried out already by other central banks including the Fed and Bank Of England is a definite non-starter. The reason for this intransigence is that the ECB does not want to let Eurozone governments off the hook, worrying that any further assistance would allow governments to slow or even renege upon promised reforms.
Whether this is true or not it’s a dangerous game to play. The fact that the previously unthinkable could happen ie a country could exit the Eurozone should have by now prompted some major action by European officials. Instead the ECB is unwilling to give ground while Germany continues to stand in the way of any move towards debt mutualisation in the form of a common Eurobond and/or other measures such as awarding a banking license to the EFSF bailout fund which would effectively allow it to help recapitalize banks and purchase peripheral debt. Germany does not want to allow peripheral countries to be let off the hook either arguing that they would benefit from Germany’s strong credit standing and lower yields without paying the costs.
To be frank, it’s too late for such brinkmanship. The situation in The Eurozone is rapidly spiraling out of control. While both the ECB and Germany may have valid arguments the bottom line is that the situation could get far worse if officials fail to act. As noted above there are various measures that could be enacted. Admittedly many of these will only buy time rather than fix the many and varied structural problems afflicting a group of countries tied together by a single currency and monetary policy and separate fiscal policies but at the moment time is what is needed the most.
It’s good to see that European officials are finally talking about boosting growth and realising that austerity is killing the patient. However, measures such as increasing trade, investment etc are all long term in nature. Europe needs action now before it’s too late. After years of keeping the Eurozone together by sheer force of political will rather than strong fundamental reasons lets hope that politicians in Europe begin to realize this before it’s too late. The lack of traction at this week’s EU summit was disappointing but with their backs to the wall ahead of Greek elections in mid June Germany and the ECB may be forced to give ground. In the meantime the beleaguered EUR looks destIned to remain under pressure.
ECONOMETER 