The ECB has bought itself time, if not a stable euro

For all Mario Draghi's rhetoric, it's what he does next that will decide the fate of the euro – and at least he has a little time

For all the understandable excitement around Mario Draghi's and the European Central Bank's announcement, it's worth remembering that the euro won't be definitively saved or abandoned on Thursday. In all likelihood, we'll be talking about how much time has been bought for the eurozone to decide what it truly wants.

The answer will be "not much" if the central bank's bond-buying programme, known as the securities markets programme, is simply reheated in its old "temporary and limited" format. That would merely provoke a guessing game about how high Spanish and Italian bond yields will go when the ECB steps out of the ring. Similarly, another dose of LTRO (long-term refinancing operation) to allow Spanish and Italian banks to keep lending would look timid. The ECB has taken that path already and it hasn't stopped the economies falling into recession.

The launch of an unlimited bond-buying programme, with the aim of capping borrowing costs for member states, would better fit Draghi's pledge to do "whatever it takes" to save the euro. But investors would want to see it to believe it. For a start, they would want to know if the Bundesbank and German politicians agree with the tactic; until political approval has been seen to have been won, there's a credibility problem.

The same difficulty applies to the idea of giving the European stability mechanism (ESM) a banking licence, thereby increasing its firepower from the current level of €500bn. Draghi may feel such a manoeuvre would be sensible, and could even say so, but it's not in his gift to deliver. Only the politicians can turn the ESM into a bank since national balance sheets would be on the line as guarantors.

Still – if you're an optimist on the euro – it's a welcome development that Draghi even put himself at the centre of the stage with his comments last week. It must mean that he has something to say, or a wildcard to play. That's unless he says the market's interpretation was a "hilarious misunderstanding", as Dario Perkins of Lombard Street Research puts it. That would not be funny.

Contributor

Nils Pratley

The GuardianTramp

Related Content

Article image
Business and markets in 2012: what we have learned
A series of banking scandals, outrage over tax avoidance and more eurozone procrastination have implications for next year

Nils Pratley

26, Dec, 2012 @4:55 PM

Article image
Quantitative easing ain't so easy to quantify
Nils Pratley: The Bundesbank’s do-nothing, let’s-wait-and-see approach to QE looks increasingly futile and dangerous

Nils Pratley

07, Jan, 2015 @7:27 PM

Article image
Euro plummets after ECB warns currency zone may need more support
European Central Bank head Mario Draghi says Japanese-style stagnation possible amid high unemployment and falling inflation

Phillip Inman, economics correspondent

09, Jan, 2014 @6:17 PM

Article image
Mario Draghi rescue plan with more misery at its core will not save euro

Impression left by announcement on unlimited bond buying is that it is technically sound – but based on flawed economics

Larry Elliott, economics editor

06, Sep, 2012 @6:07 PM

Article image
Italy's anti-austerity vote raises the spectre of a bailout
Current bond yields suggest a touching faith that a workable political fudge will emerge sooner or later. But what if it doesn't?

Nils Pratley

26, Feb, 2013 @6:48 PM

Article image
ECB gets ready to pump cash into eurozone as fears rise over recovery
Mario Draghi says preparatory work in place for quantitative easing to combat deflation and economic stagnation

Angela Monaghan

07, Aug, 2014 @6:55 PM

Article image
France calls on ECB to act as eurozone growth grinds to a halt

France made it clear it blamed foot-dragging on the part of the European Central Bank for the failure of the eurozone's second biggest economy

Larry Elliott, economics editor

14, Aug, 2014 @6:13 PM

Article image
Greece threatens new elections if eurozone rejects planned reforms
Athens’ finance minister Yanis Varoufakis says referendum or new election on fiscal policy is possible if deadlock remains

Helena Smith in Athens

08, Mar, 2015 @6:02 PM

Article image
Greece tells IMF it wants early exit from rescue programme
Largest such programme in global financial history had aimed at preventing debt crisis from spreading through the eurozone

Helena Smith in Athens

12, Oct, 2014 @9:53 PM

Article image
British and German factories see sharp slowdown in manufacturing
Stock markets fall across UK, Europe and US as sluggish eurozone and global conflict hit economies

Angela Monaghan and Phillip Inman

01, Oct, 2014 @8:18 PM