The ECB, with its virtually unlimited ability to print money and ease the financial pressure on indebted nations, has been using that power as leverage in pushing the leaders of individual countries to accept an increasingly regional approach to economic challenges. On the table are specific proposals that would overturn the way European governments have long handled their financial affairs.
There have been growing calls for the ECB to use its considerable arsenal more aggressively. Some financial and political analysts say a grand bargain may be in the works: In return for major steps by euro-zone members toward economic federalism, the ECB could buttress struggling countries such as Spain and Italy.
The ECB is widely considered the one institution that could quickly put a stop to the accelerating euro crisis and head off a possible breakup of the currency union.
But instead of offering a quick fix, the ECB has parceled out its help only at critical moments, letting market tensions rise until it can extract concessions from Europe’s elected leaders that are aimed at better financial management. The bank’s willingness to stand aside — and risk further escalation of the financial turmoil — has become a defining feature of the crisis.
With Spain’s economy teetering and concern mounting that Greece may exit the euro zone after national elections this month, European leaders have been under increasing pressure to take significant new steps. These include proposals to regulate financial firms at the European level, offer regional support for weakened banks and issue bonds backed by all euro-zone governments.
On Monday, German Chancellor Angela Merkel offered her most explicit endorsement of some of the proposals. These include establishing a central regulator for European banks, whose oversight has been a jealously guarded — but arguably mishandled — national prerogative.
“I have often said that in the euro zone we need more Europe and not less Europe,” Merkel told reporters in Berlin before a meeting with European Commission President Jose Manuel Barroso. She said the two leaders would discuss “to what extent we need to put systemic banks under specific European supervision to keep national interests from playing too large a role.”
A U.S. Treasury official, meanwhile, said Spain’s deteriorating position, reflected in the soaring interest rates it must pay to borrow money, was having the same effect as previous bouts of market instability — and forcing politicians to act.
“European leaders appear to be moving with a heightened sense of urgency,” the official said, adding that action is expected “over the next several weeks” on issues including moves to bolster the banking systems in Spain and elsewhere.
A financial collapse in Spain poses a profound threat to the U.S. and global economies because it could deepen Europe’s recession, cause a new American downturn and prompt banks worldwide to shut down lending, as happened after the collapse of the Wall Street bank Lehman Brothers in 2008.
These renewed dangers have touched off a familiar dynamic. The ECB and Germany, the region’s economic powerhouse, are withholding help while pushing European countries to make concessions aimed at reining in government deficits and debt. Much of Europe — and the world — is pressing for faster action to support struggling governments.
“Before the ECB intervenes again, they may actually announce something that resembles an economic union,” said Ludovic Subran, chief economist with Euler Hermes in France. He cited a shift in Germany’s willingness to consider the introduction of bonds jointly issued by all euro-zone members as a way to ease the problems faced by some individual governments in borrowing money at affordable rates.
As Spain has struggled in recent weeks, calls have intensified for the ECB to help keep the country from needing an international bailout. But the bank, as it has before, appears to have been setting conditions for its help. In recent days, for example, ECB officials have endorsed plans for a European banking union — in essence, a transfer of power over each nation’s financial sector to a central authority — as well as other changes such as the creation of a euro-zone-wide guarantee on bank deposits.
These measures would involve a major loss of regulatory sovereignty for each nation as well as a potential expense. But the idea appears to be gathering momentum ahead of this month’s summit.
The banking union idea would not help Spain cope with its mounting short-term problems — a recession, record-high unemployment and the need to raise tens of billions of dollars to prop up its financial sector.
But it is the type of step that has previously encouraged the ECB to provide vital short-term relief at times of heightened risk, in some cases violating its own explicit “red lines” to do so.
ECB continues bargaining
The central bank has a wide range of tools. Over the past two years, it has bought hundreds of billions of dollars in bonds issued by several European governments — a program that is currently paused but could be restarted. The ECB has also lent $1 trillion to banks and could provide more. It could go further, as the U.S. Federal Reserve has done, and pump money into the economy through an ambitious program of bond-buying aimed at stimulating economic activity.
The ECB, however, has repeatedly stopped short of the kind of emergency measures taken by the Fed. At the start of the U.S. financial crisis, for instance, the Fed made clear that it was prepared to backstop the entire financial system — and began buying hundreds of billions of dollars in government bonds and other assets to prop up different parts of the economy. As with other major central banks, the Fed also implicitly guarantees the repayment of U.S. government bonds. Because of the structure of the euro, the ECB does not provide such a guarantee, and U.S. and other officials have urged Europe to develop that sort of ultimate backstop for national debt.
There is little doubt, analysts say, that the ECB would move quickly if it determined that Spain was approaching the point — as Greece, Ireland and Portugal previously have — at which it was unable to raise money on its own in international markets.
But until then, the bargaining continues over how to move the euro zone from its “incomplete” union to one in which economies are better aligned, budgets and spending are better coordinated, and debt is under control. Without progress toward that end, analysts say, the ECB is hesitant to act, for fear of letting governments off the hook.
“That is the pattern — you see things going bad, and then they wait until the very last minute. The question is, when is the last minute?” said Carsten Brzeski, senior economist with ING Financial Markets Research.
Birnbaum reported from Berlin.