At issue is the question of whether anyone else could step in with the hundreds of billions of dollars that Italy, Spain and other euro-zone governments would need in coming months to fund themselves if private investors continue to turn away from European bonds for fear of a national default.
These financing needs would outstrip the current capacity of the International Monetary Fund to help. Leading governments outside the euro zone, including China, Brazil and the United States, have demanded that Europe first tap its own available means before any new steps are taken to increase the IMF’s firepower or provide other aid to the euro zone.
Analysts say the options have boiled down to two: either Germany agrees to put more of its own money at risk in a regionwide bailout fund or the ECB steps in more forcefully to buy enough bonds from Italy, Spain and other countries to ensure their borrowing costs remain at an affordable level. The ECB is already buying Italian and Spanish bonds in an effort to increase market demand for them and, thus, force down the interest rate that governments must pay to lenders.
A growing list of European leaders insisted this week that the ECB offers the quickest and most certain way to reassure investors that euro-region countries will remain solvent, with French, Spanish and Irish leaders saying bluntly that they felt it was time for bank policy to change.
From outside the euro zone, British Prime Minister David Cameron used a trip to Berlin on Friday to make the same point. Although his country continues to use the pound and not the euro, Cameron said the British economy is at risk from the euro zone’s troubles, and he told German Chancellor Angela Merkel that the currency region needs to come to terms with its problems.
“All the institutions of the euro zone have to stand behind the currency and do what is necessary to defend it,” Cameron said.
Germany does not want to become the sole financier of the euro area. But Merkel and other German leaders are also adamant that the ECB has only a limited role to play in the region’s crisis response.
Germany joined the euro region only after receiving guarantees that the ECB would be run on the same principles as the Bundesbank, the German central bank — which has a singular focus on controlling inflation, strict independence from elected officials, and little room to finance governments or engage in the type of massive bond-buying programs undertaken by the Federal Reserve to boost the U.S. economy.
Merkel, as she has throughout the crisis, said the only solution was for countries to put in place more responsible economic and fiscal policies.
“If you have lost confidence, you have to regain that confidence step by step, and you have to actually put things that you have decided into effect,” she said.
The governments of Greece, Spain and Italy are under intense pressure from the markets and world leaders to make budget cuts and economic policy changes. But a slowing European economy is making it harder for these governments to meet their targets for reducing budget deficits, as revenue falls and the demand for public services rises.
With global investors growing skeptical about the financial health of France, the euro zone’s second-largest economy, President Nicolas Sarkozy has proposed two rounds of spending cuts and tax increases this year. So far, France has retained its top AAA credit rating.
Speaking at a bank industry meeting in Frankfurt, Draghi aligned himself with Merkel in arguing that it is Europe’s politicians who have been dragging their feet. Needed changes in economic policy have come slowly, and new bailout programs approved by European leaders have not been put into action despite the accelerating crisis.
“Where is the implementation of these long-standing decisions?” Draghi said, noting that the European Financial Stability Facility, the region’s bailout fund, was created 18 months ago but that basic questions about its use and funding remain unresolved.
Draghi noted that the ECB had used a number of “nonstandard” strategies to battle the crisis, such as buying government bonds in limited amounts and providing loans to banks to ensure they have the funds needed to operate.
But he made clear that those sorts of efforts — or others — could not come at the expense of the bank’s focus on controlling inflation. When the ECB was established in 1998, it adopted the Bundesbank’s overriding mandate to control inflation, a mission born of Germany’s traumatic experience with hyperinflation after World War I. By contrast, the Fed has a dual mandate: controlling inflation and reducing unemployment.
“Credibility implies that our monetary policy is successful in anchoring inflation expectations,” said Draghi, former chief of the Italian central bank. “This is the major contribution we can make. . . . Gaining credibility is a long and laborious process. . . . Losing credibility can happen quickly — and history shows that regaining it has huge economic and social costs.”
Efforts to rebuild confidence in the euro, he said, “must be rooted in a much more robust economic governance of the union going forward.”