EuroTragedy by Ashoka Mody

EuroTragedy by Ashoka Mody

Author:Ashoka Mody
Language: eng
Format: epub
Publisher: Oxford University Press
Published: 2018-05-11T16:00:00+00:00


ECB Scrambles to Stop the Trauma, Merkel Helps: July–September 2012

“The bumblebee,” Draghi began, “is a mystery of nature because it shouldn’t fly but instead it does.” Thus, his opening salvo to the investors was, “The euro is like a bumblebee. The euro is much, much stronger, the euro area is much, much stronger than people acknowledge today.”122

But presumably, Draghi quickly realized that these quaint allegories were failing to charm the skeptical and restless audience. Unusually for a central bank chief, Draghi was speaking without a prepared text.123 “There is another message I want to tell you,” he said. “Within our mandate the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Tim Geithner, by now former US Treasury secretary, later wrote in his memoirs, “Draghi had not planned to say this, but he was so alarmed by the darkness expressed by hedge funds and bankers at the conference that he ad-libbed an unequivocal commitment to defend Europe.”124

Investors cheered. They read Draghi’s “whatever-it-takes” statement as a guarantee that if a government could not repay its debts, the ECB would do so on the government’s behalf. The yield on Italian bonds fell to 6 percent the day after Draghi’s speech from 6.5 percent in the days before; Spanish bond yields fell to 6.75 percent from 7.5 percent. Stock prices of banks began to recover.

Draghi had made a promise, but Geithner later noted that the ECB and European authorities had no clear idea what they were “actually prepared to do.”125 The assumption was that the ECB would buy, or promise to buy, the bonds of euro-area governments to prevent interest rates from rising too high. But how would the ECB do that? And would Draghi have the political support to deliver on his promise?

On July 27, the day after Draghi’s speech, the Bundesbank announced its opposition to any ECB commitment to buy government bonds. The Bundesbank was worried that such a commitment would dilute the incentives of heavily indebted governments to maintain fiscal discipline and, therefore, would expose the ECB to substantial financial risk.126

But also on July 27, Merkel gave Draghi her instant and crucial support. She did not speak specifically about bond purchases, but she echoed Draghi’s words. Germany, she said, was “committed to do everything to protect the eurozone.”127 Schäuble welcomed Draghi’s intention to “take the necessary measures to secure the euro in the framework of the existing ECB mandate.”128

Undeterred, Weidmann kept up his powerful opposition. On August 2, at the press conference that followed the ECB’s regular rate-setting meeting, Draghi conceded that the decision to move ahead with a bond-purchase program had not been unanimous. And breaking with ECB tradition, he named the dissenter: “it’s clear and it’s known that Mr. Weidmann and the Bundesbank . . . have their reservations about programmes that envisage buying bonds.”129 Weidmann was an important foe, not just because he was the Bundesbank’s president, but also because he gave voice to reservations widely shared in Germany, including by several Bundestag members of Merkel’s CDU and coalition partners.



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