From the time the European sovereign debt debacle began to unfold a year and a half ago, it has represented the confluence of several chronic problems. Underlying it all is the imposition of a common currency on a vast territory whose economic potential, labor mobility, fiscal discipline and political processes are so varied that significant dislocations are virtually inevitable. In good times, OPM—other people’s money—flowed freely enough to blur the differences and keep the fiction of a (mostly) functioning continental monetary system alive. As is so often the case, the “greater fool” theory of market speculation allowed weak countries to borrow as if their credit were as good as the strong ones. These are no longer good times.
Nevertheless, as with the strong nuclear force that keeps together subatomic particles that ought to repel each other, a combination of economic, legal and historical forces continues to hold the Eurozone together, however logical its dissolution might appear. In an unusually blunt statement for a central banker, European Central Bank (ECB) President Mario Draghi recently said as much, asserting that the ECB will “do whatever it takes” to hold the Eurozone together and, he added, “believe me, it will be enough.”1
I’ve heard enough comparable pronouncements in the past to know they aren’t always divine truth. I recall, for example, hearing an ECB official a year or so ago dare an audience of global investors to sell Greek sovereign debt short because the ECB would crush them if they did. At least some of those investors appear to have taken that dare and may well have profited handsomely from it as Greek government bonds continued to decline in value.
But I read this pronouncement in the context of how European institutions, and the ECB in particular, have consistently intervened as successive crisis points erupted, each time leading to an ever greater centralization of European authority. As Signor Draghi said: “To the extent that the size of the sovereign premia hampers the functioning of the monetary policy transmission channels, they come within our mandate.” In other words, the ECB might overcome its prohibitions against directly financing individual governments by treating all sovereign bond purchases merely as part of its normal implementation of Eurozone monetary policy.
We’ll wait to see if Draghi puts this newly discovered power into action and leave it to the constitutional authorities to figure out if it’s legal, but for now the one entity that can do the most to centralize European economic policy, the ECB, appears to be taking another big step in that direction. And I maintain my stance: More crisis means more Europe.
1. ECB ‘ready to do whatever it takes’, Financial Times, 7/26/12.