The European Central Bank (ECB) said today it was ready to intervene in the bond market in order to help ailing eurozone economies like Spain and Italy. But the bank’s vagueness over how and when it would intervene and the absence of any new ideas to boost the continent’s economic growth convinced investors that Europe is still divided over a remedy for its debt crisis. Regional markets tumbled as a result.
ECB President Mario Draghi‘s announcement had been eagerly awaited by bankers around the world. But he did not, as widely anticipated, give details on how a new bond-buying scheme might work. Instead he remained vague, saying, “The [ECB’s] governing council […] may undertake outright open market operations of a size adequate to reach its objective.”
“After all, these remain promises,” Dan Greenhaus, chief economist at BTIG trading firm, told theAssociated Press. “Investors are tired of promises. They want action.”
Mr. Draghi’s refusal to be more specific today is an illustration of the political battle that is taking place within the eurozone and of the tensions that exist within the ECB’s governing council, where each eurozone member state has a vote.
The battle finds two camps pitched against each other with fundamentally opposing views on how to solve the debt crisis. One camp believes that supplying fresh money out of the ECB’s printing press to buy the bonds from struggling countries, possibly even an unlimited amount, is necessary to bring down soaring interest rates that are taking countries to the brink of insolvency. Southern eurozone members, including Spain, Italy, and Portugal, but also France, subscribe to this perspective.
The other camp consists of Germany, Austria, the Netherlands, and a number of other northern European countries, who believe that starting the printing press will not only induce inflation, but also diminish the pressure on eurozone governments to cut spending and reform their uncompetitive economies. Northern members also are opposed to all attempts at pooling debt, making the whole of the currency union liable for the arrears of individual member states.
Earlier hopes dashed
Just a week ago, it had seemed that this fundamental disagreement had been settled.
On July 26, Draghi told the Global Investment Conference in London, that, “within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
His statement was widely read as the long-awaited announcement of a new bond-buying program. The ECB has already spent €211 billion on acquiring debt of eurozone members, despite resistance from Germany, but stopped doing so earlier this year.
After Draghi’s promising London announcement, German Chancellor Angela Merkel, French President François Hollande, and Italian Prime Minister Mario Monti, issued joint statements, echoing Draghi’s words. It seemed clear that German opposition to the program must have waned.
But the vagueness of today’s announcement left investors deciding German opposition remains.
No end in sight
Nor does there appear to be an end to this conflict in sight. “If the ECB were to buy government bonds we’d be financing failing governments through the backdoor,” says Alexander Dobrindt, a leading conservative Member of Parliament in Germany.
Jürgen Stark, a former German member of the ECB council, says buying more bonds would betray the German taxpayer: “It is not just contravening European agreements, like the Maastricht Treaty. It would also mean breaking promises our government has given to the German nation.”
But there may be no alternative, says David Owen, economist at Jefferies, a London-based investment bank. “A year ago, when the first bond-buying program was started, the situation in the eurozone was not nearly as critical as it is now,” he says. He expects that within the next weeks the ECB will specify which “unconventional measures” it is willing to take to save the euro.