The argument has been underway for quite some time now that the sole solution for the eurozone is to win a balance between those who demand uncompromising fiscal discipline and those seeking community backing or guarantees for their unsecured debt. More than three years on, the European bureaucracy has proved incapable of coming up with solutions to make that balance possible.
Meanwhile, the European Central Bank (ECB) has taken on some controversial work as an emergency liquidity provider for the most stressful market situations. However, each time the ECB carried out an extraordinary liquidity operation, European economic governance apparently won time to look for new solutions – yet, again and again, slumped into inaction and lethargy. This wearying dynamic has been replayed many times, threatening the very stability of the single currency. Then came Mario Draghi. And he changed the rules of the game.
At first the ECB president took great pains to clarify that if the liquidity facilities were needed he would push them along like no one else, and, in fact, in December 2011 and February 2012 launched two programs of long-term refinancing of singular importance. And when it was revealed that the leaders in Europe were not responding in comparable scope, the ECB began to alter the discourse. In spring, but mostly over the summer, the European monetary authority imposed a few rules that would change this ineffective European economic governance.
On one hand, there were many reminders that the responsibility for correcting the debt crisis and finding that desired balance between fiscal compromises and financial solidarity could not rest with the monetary authority. On the other hand, in the end the ECB made an astute step forwards by imposing on the eurozone an agenda that the eurozone leaders proved reluctant to assume.
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Draghi gave the best example this summer, and in doing so became the genuine creator of new rules of the game – the game changer that the euro needed. Thursday’s gamble by the ECB was a risky one, but it was more coherent than many are ready to take on. Some still recall, for example, that at the start of the summer Draghi declared that he would do whatever it would take to save the euro.
The reality is that he did it because it forced some to accept the necessary conditionality – for Spain, that will be a new bail-out – and others to accept that without financial solidarity there will be no future for anyone within the eurozone. The title of the debt purchase program – Outright Monetary Transactions – is sufficiently illustrative. It has laid the foundation of what seemed to be the impossible understanding between North and South in the eurozone. In advance the ECB has launched "unlimited" or “outright” aid, which should not be scorned.
Credible ratification of the euro
The ECB has, moreover, remained cautious from the monetary point of view as it seeks to sterilise the purchases it carries out to prevent them from being converted into a simple debt monetisation. That move, rather, is about establishing aid in return for conditionality – something that simple, which they have been looking for many months with no success. Because the exchange is clear – a precautionary or supposedly "soft” bailout, probably with tougher conditions than realised in Spain, but far from what it was for Ireland or Greece – it’s a step towards a more hopeful future.
With the steps that have been laid down, the initial outcome, if things are done right, will be a credible ratification of the euro and, on the other hand, a likely reduction in financing costs for vulnerable countries – conditions that are necessary but insufficient for investor confidence to return to countries like Spain. All this may happen if the opportunity given is not wasted.
And that applies to Spain, which will have to request the bailout with appropriate responsibility. This is no trivial matter, because our country will find itself through no will of its own in that cement that the euro needs, not least because speculators believe that the fabric of the currency will start to tear beginning in the south. Then will follow Italy, which will not escape from this and will have to respond.
The end is far ahead. Though it may seem optimistic, nonetheless, it may be the beginning of the end of the agony.
For Il Sole 24 Ore, which has been campaigning for intervention along the lines of the ECB initiative announced on 6 September, no praise is too great for the central bank’s president Mario Draghi, who has “shown that he has the courage to be independent” and to honour his pledge to do “whatever it takes to save the euro” —
The master technician in Frankfurt has done his duty and demonstrated a rare independence and political courage, which, in a time of crisis marked by the demands of a constant stream of elections, is hard to find in Europe. Draghi has not hesitated to defy open opposition from the Bundesbank and, worse still, German public opinion. […] Not only has he patched over the errors that have resulted from three years of inadequate and divisive European policy which brought the euro to the brink of disaster, but he has also laid a fresh foundation that will stabilise the structure of the single currency and provide it with a coherent and credible future.
“Now is the time for governments to respond”, writes the business daily, which argues that those who feared that the ECB safety net would be incentive for laxism should be reassured by the condition requiring the intervention of the European Financial Stability. On the contrary, this measure may have the effect of “accelerating the implementation of reforms and adjustments to public finances, which will enable national administrations to avoid submission to a European tutelage that is unacceptable to public opinion”.