The European Union seems stuck in an endless loop of the old joke about an Irishman (aptly enough) giving directions: "I wouldn't start from here."
ECB president Mario Draghi caused a surge of optimism, or let's say diminished pessimism, earlier this week with his assurance to an audience in London that the central bank would do "whatever it takes" to preserve the single currency: "Believe me," he said, "it will be enough." Good news, you think: That would have to include buying Spanish and Italian bonds, since that's what it will take. But hadn't he previously said, to loud affirmation from Germany and elsewhere, that the ECB lacked the authority to do this? Not quite, in fact. The question of authority turns on a distinction which seems to be important to Mr Draghi but that many others fail to understand. As the FT reports, he repeated this delicate point this week.
Following days of market turmoil and concern that Spain's high borrowing costs could force it to seek a full sovereign bailout, Mr Draghi suggested the ECB had a remit to intervene if market interest rates were not "inherent" to borrowers and interfered with the central bank's implementation of monetary policy - its prime tool for fulfilling its core task of maintaining price stability.You find that unclear? Me too, but let's not fuss over details. Let's just agree: Market interest rates are not, erm, inherent to borrowers at the moment and, boy, are they interfering with monetary policy. Whatever. The ECB needs to act. On Friday, after talking it over, Angela Merkel and Francois Hollande didn't rule it out. "European institutions...must fulfill their obligations," they said, as though settling a previously disputed point.
Then came the clarification.
Critically, several senior officials said the ECB was unlikely to dip back into Spanish and Italian bond markets unless it was preceded by action from the eurozone's €440bn rescue fund, the European Financial Stability Facility, which last year was given the power to purchase bonds both on the open market and at auction.So once again, Europe can't quite start from here. Unless it can stipulate, of course, that it has moved to a different place without anybody noticing. Reforms are in place! Our preconditions have been met and our firm resolve rewarded! Mr Draghi, go ahead!
Wolfgang Schäuble, the German finance minister, hinted at that unspoken bargain on Friday, releasing a statement saying that while he welcomed Mr Draghi's commitments, there were "preconditions" to any ECB action.
"The precondition is that politicians take the necessary measures to address the financial and confidence crisis," Mr Schäuble said. "First and foremost are the reform efforts of the member countries themselves," he added, mentioning recent efforts by both Spain and Italy.
We'll see. Financial markets pushed Spanish and Italian bond yields a bit lower today. They're calculating that Draghi, at least, is coming round. I hope they're right. In the end, Europe's future is likely to come down to him.
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