In late July, European Central Bank (ECB) President Mario Draghi, speaking off the cuff in London, pledged to do “whatever it takes” to save the Euro, including massive intervention in bond markets to keep speculators from extending the Greek disease to Spain and Italy, where interest rates were ominously rising. This impressed money markets for a few days—until investors realized that Draghi’s commitment came with big strings. Strapped countries benefitting from these purchases would first have to double down on austerity. No thanks, said the leaders of Spain and Italy.
On September 6, Draghi tried once more. After more than a month of consultations with his own board and national leaders, he declared that the ECB would make unlimited purchases of short term government bonds. He claimed “a massive majority of the [ECB] governing council for this concept.” But the council member who mattered most, Bundesbank President Jens Weidmann, remained adamantly opposed. A Bundesbank press spokesman even issued a blunt statement warning that Weidmann “regards such [bond] purchases as being tantamount to financing governments by printing banknotes.”
To mollify the hawks on his own governing board, Draghi repeated the conditions of his earlier failed effort: Governments that wanted help from the ECB would have to sign up for rescue funds from the EU and strict supervision of austerity budgets by the European Commission and the IMF. Nothing doing, said the leaders of Spain and Italy. Despite a temporary stock market bounce in response to Draghi’s offer of increased bond purchases, the larger impasse and deepening crisis continued.
Despite suggestions in the press that the ECB was at last moving to become more like the Federal Reserve, two differences remain key. Under Ben Bernanke, the Fed has been entirely willing to pursue policies “tantamount to printing banknotes”—exactly what’s needed in a deep recession to lower interest rates. And Bernanke has refused to be an agent of fiscal austerity. While Draghi was brokering his latest deal, trading more bond purchases for more fiscal restraint, Bernanke was giving an opposite speech at the Federal Reserve’s annual summer conference at Jackson Hole, Wyoming, warning against too much fiscal restraint as Congress threatened to raise taxes and cut spending in a deep recession—folly that Bernanke decried as a “fiscal cliff.”
So the ECB giveth with one hand and taketh away with the other. Draghi, looking over his shoulder at German Chancellor Angela Merkel, has made Italy and Spain an offer they can’t accept. As long as this path continues, it leads only to deeper European depression.