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Home > Blogs > Anthony Harrington > Mario Draghi galvanizes markets with same old same old...

Mario Draghi galvanizes markets with same old same old...

Mario Draghi galvanizes markets with same old same old... Anthony Harrington

You have to hand it to Mario Draghi. It takes some nerve after all the empty promises of the "we'll do whatever it takes" variety which the EU political class has trodded out at regular intervals through the sovereign debt crisis, to stand up yet again and say: "We'll do whatever it takes". Quite why the markets chose to believe Draghi this time round (26th July 2012) is wildly unclear. But believe him they did. Wall Street climbed about 250 points almost before Draghi had finished speaking.

What the markets want is perfectly clear. They want the European Central Bank to take the heat off Spanish and Italian bond auctions by stepping in as a vigorous buyer of the sovereign debt of these two countries whenever the bond market shows signs of wanting exorbitant yields to invest in their debt. The ECB already has tonnes of rubbish debt on its books and is not at all keen on buying still more of the same. Its Bundesbank pedigree makes printing money to shore up dodgy governments something of an anathema to it.  But Draghi knows that traders cannot ignore the fact that the ECB could step in at any moment and support either the euro or troubled member states, and that its pockets are, for all intents and purposes, relatively bottomless.

As Ambrose Evans-Pritchard makes clear in his blog in the Telegraph, Draghi's signal was deliberately pitched to get the attention of traders. The ECB will do whatever it takes to save the euro, provided it can do so without contravening its mandate, Draghi said. Evans-Pritchard points out that these comments followed hard on the heels of comments by the Spanish to the effect that they were going to call for the European Financial Stability Fund (EFSF) to support Spain by buying Spanish bonds. If the EFSF does do this, then, Evans-Pritchard points out, "that would provide political cover for the ECB to join the fray in a two-pronged attack."

The point is that EU leaders have gone through the whole crisis promising to "do whatever it takes". This has caused the markets to rally almost each and every time and within days the markets have collapsed again as it became clear that "doing whatever it takes" actually parses as: "doing as little as possible". One has to wonder what the shape of the European sovereign debt crisis would have been had Merkel and Co. had the courage to fund Greece strongly right from the first wobble - while pushing the country hard for reasonable reforms. Instead we had a drip feed of insufficient funding coupled with massive austerity, both inevitably tending to exacerbate the situation.

That there would always have been a European sovereign debt crisis of fairly massive proportions now seem clear, irrespective of what action the EU took. The lack of competitiveness of the peripheral nations, allied to spendthrift government policies and a balance of trade that saw euros pouring Germany’s way year after year as consumers in the periphery tapped into cheap euro loans and bought (largely) German goods, would have been trouble whatever the authorities did. There is only one viable solution that preserves the euro and that is full fiscal union with a regular transfer of payments to the periphery. Germany, it seems, is still a long way from buying into this option...

Further reading on the sovereign debt crisis:

Tags: European Central Bank , European Financial Stability Fund , Germany , Mario Draghi , Merkel , sovereign debt crisis
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