Bond yields in the trouble spots of Europe have actually come down a bit, as observers get more comfortable with Mario Draghi’s unfolding strategy at the ECB. Remember that this is all based on the idea that labor market reforms in the troubled sovereigns, which amounts to “internal devaluation” or widespread suffering borne on the working classes, will save southern Europe. They would get help with their borrowing costs, but they’d have to decimate their public sector and bust their unions to do it. I don’t know why anyone should assume this would even be a winning strategy. What happens when the labor market reforms fail to bring back the economy, because growth will remain depressed due to public sector contraction and collapsed demand? And at that point it will be the EU leadership’s problem, because they’ll have wrung out the last bit of sovereignty from their client states. The Articles of Confederation were better-managed than the current set of EU rules and regulations.
But anyway, that appears to be the script, and Draghi is waiting for the last possible moment to intervene, while making his compatriots more comfortable with his approach. Germany happens to be the big fish in this pond, and they’re slowly softening their view:
Members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of European Central Bank chief Mario Draghi’s plan to buy government bonds.
The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a European Parliament lawmaker and executive-committee member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today.
Norbert Barthle, CDU budget spokesman, said that German lawmakers will have veto rights over bond purchases by the euro- area’s rescue funds, which would operate in tandem with the ECB under Draghi’s proposal. The temporary fund “was created for a purpose and bond-buying is in the manual,” Barthle said yesterday by phone.
That puts Merkel’s party on the same side as Draghi and the IMF, making the troika (Germany dominates the EU) almost entirely on board with the concept. The Bundesbank, Germany’s central bank, remains an obstacle, but they couldn’t get commitments from any of the Northern European counterparts to block Draghi’s bond-buying scheme. So Draghi can wait for the ESM, the new bailout fund, to get approved via German constitutional court on September 12, and then wait for Italy and Spain to formally request aid, so a deal can be struck with multiple strings attached.
Meanwhile, US banks don’t consider themselves exposed to the Eurozone, but fear spillover effects if policymakers bungle the response. Which means more pressure on Germany to allow Draghi to do the “right” thing. But is it so right?
UPDATE: Simon Johnson does a better job of saying what I say here. But he confines himself to monetary policy when talking about Draghi, and I don’t know if this is really what he’s doing. He’s really acting as a fiscal policymaker, one with the purchasing power to force the other countries to heel.