David Ignatius offers two cheers for Mario Draghi, the head of the ECB, for giving away super-cheap money to bankers. These pundits love their banking daddies, don’t they? Ignatius does realize, however, that the real problems in Europe are beside the point of the banking debt crisis. The problem is he thinks the real problem is the lack of an enforceable fiscal union.
So, two cheers for Super Mario: His creative banking recalls innovative actions taken by Federal Reserve Chairman Ben Bernanke to keep U.S. credit markets operating during the dark days of 2008. Draghi’s backdoor measures finessed Germany’s angst about money-creating central banks (and their inflationary dangers); this German opposition prevents the ECB from lending directly to member countries.
The reason to withhold a third cheer for Draghi is that he can’t solve the core European problem, any more than did Monday’s European summit with its unconvincing announcement of ever-closer union. The reality is that the 17 governments that use the euro will not give up their sovereignty, no matter how loudly the Germans demand pledges of fiscal discipline. Until there really is a United States of Europe (which is probably never), any such fiscal promises will be unenforceable.
Um, no, the reason to withhold a third cheer for Draghi is that he aligns with the general consensus of Eurozone leaders, that they can expand through austerity or “labor market reform” rather than taking the steps necessary in a recession to induce economic growth. Those leaders may be coming around faster than Ignatius, however. Paul Thomsen of the IMF, seen as an architect of Greece’s austerity policies, just realized they can’t actually work:
A leading architect of the austerity programme in Greece – one of the harshest ever seen in Europe – has admitted that its emphasis on fiscal consolidation has failed to work, and said economic recovery will only come if the crisis-hit country changes tack and focuses on structural reforms.
“We will have to slow down a little as far as fiscal adjustment is concerned and move faster – much faster – with the reforms needed to modernise the economy,” he told the Greek daily Kathimerini, adding that the policy shift would be “reflected” in the conditions foreign lenders attached to a new rescue programme for Athens.
In an extraordinary departure from the script the IMF has followed to date, the Danish official, who is also in charge of the IMF programme in place in Portugal, acknowledged there was a “limit” to what society could endure.
“While Greece certainly will have to continue to reduce its fiscal deficits, we want to ensure – considering that social tolerance and political support have their limitations – that we strike the right balance between fiscal consolidation and reforms,” he said. As such, the IMF had cautioned against “an excessive pace” of fiscal reduction.
Now, these “reforms” are far from the correct remedy (a real tax collection system in Greece, particularly for the wealthy, would help). In fact, many of them are simply austerity policies tarted up as reforms. But hearing this IMF official pull back on the crushing austerity a bit at least reflects the reality of the situation. The fact is that years of austerity have done absolutely nothing to improve the economic situation in the peripheral countries. Their unemployment rates are astoundingly high and that will surely seep into their trading partners throughout the rest of the Eurozone before long.
This is why real fiscal transfers are necessary – not quite what Ignatius had in mind, but the actual reason for the relative success of the United States, and what could save Europe. The euro cannot survive without a rebalancing among its member states. Either that or the Eurozone uses the time Draghi and the ECB has bought them to sever ties with Greece and restructure debt in Portugal, with big haircuts for the creditors. Tim Duy writes:
For now, however, market participants are focused on the salutary effects of the ECB’s LRTO (not to mention expectations for another round of QE from the Fed). Have these efforts eased conditions enough to allow for a Portuguese restructuring or even Greece’s exit from the Euro? Or have market participants and European policymakers been drawn into a dangerous path of complacency? Thinking aloud, do current market conditions embolden German politicians to think they can finally cut Greece loose with little or no consequences to the rest of Europe? Would this indeed be the case? I have trouble believing in the “orderly exit” story, but perhaps the can has been kicked far enough down the road that it can happen.
I have more faith in an exit simply because the alternatives are just as horrible, especially for the citizens of those periphery countries.