European Central Bank to investors: Keep panicking

Mario Draghi (THIERRY CHARLIER/AFP) Here’s how onlookers thought this week’s European summit might play out: The euro zone nations would tentatively agree to a new fiscal measures to rein in their debts. And then the European Central Bank would step in with its gigantic firehose and put out the market conflagrations that are threatening countries like Spain and Italy. ECB President Mario Draghi hinted as much last week when he said that “other elements might follow” the new government reforms. As Martin Wolf notes, the markets seemed to interpret that as a sign that the central bank would intervene to cap borrowing costs for troubled euro nations.

But in his press conference today, Draghi appeared to dash those hopes. Draghi told reporters that “the ECB’s governing council has never discussed setting limits for bond yields or bond spreads for euro-zone debt.” In other words: the central bank action that was supposed to make the euro zone deal work hasn’t even been under discussion. Not surprisingly, the euro, which had risen on the news that the ECB was cutting rates to bolster growth in Europe, immediately plunged. Italian and Spanish bond yields are spiking uncomfortably once again.

That doesn’t mean there’s no hope for the euro. The Financial Times reports that European leaders are considering cobbling together multiple rescue funds — potentially worth more than €1 trillion — that, along with IMF money, could help backstop troubled countries. But even these measures are controversial. Which means, for now, it looks as if the certain resolution that many were hoping for remains a long way off.