By committing its massive firepower, the ECB is seeking to ease the pressure on beleaguered European countries that have faced steep and potentially unsustainable costs for borrowing money. A default by a major economy, such as Italy or Spain, could trigger a deep recession in Europe and snuff out the U.S. recovery.
Along with an earlier round of trillion-dollar loans to help stabilize troubled European banks, the ECB has now addressed the two largest threats to the continent’s financial system.
The effect of the bond-buying program unveiled by ECB President Mario Draghi on Thursday was immediate. Borrowing costs for Spain and Italy, which had been drifting downward in recent days in anticipation of the announcement, hit their lowest levels since the spring.
But, by itself, the ECB initiative will not revive Europe’s shrinking economy or cure the region’s chronic problems. Europe’s recession has been proving a significant drag on the global economy and taking a toll on the bottom line of U.S. and other companies that export to the 17-nation euro zone.
On Thursday, the ECB and the Organization for Economic Cooperation and Development forecast that the recession would continue through this year and into the next. The region’s economy suffers from a lack of competitiveness in several euro-zone nations, heavy government debt and concerns about whether the currency bloc can survive.
The new program, however, answers a long-standing call by the Obama administration, the International Monetary Fund and many others for the ECB to be more aggressive in tackling the euro zone’s crisis.
“We want this to be perceived as a fully effective backstop,” Draghi said at a news conference in Frankfurt, Germany. “We are in a situation where a large part of the euro area is in a bad equilibrium, where you have self-fulfilling expectations that feed upon themselves and generate very adverse scenarios. There is a case for intervening to break these expectations.”
ECB’s evolving role
By agreeing to buy government bonds when investors balk, the ECB is moving much closer to becoming a “lender of last resort,” a role traditionally played by the U.S. Federal Reserve and other central banks. The ECB was created with a narrower mandate than the Fed or Bank of England, say, and is barred by European treaties from financing individual governments.
Draghi said the new program won near-unanimous support on the ECB board, with only a single dissenting vote. Jens Weidmann, head of Germany’s central bank, has been adamantly opposed to the idea, saying in a recent interview with the news magazine Der Spiegel that the bond-buying initiative would violate the ECB’s legal mandate and was “too close to state financing via the money press for me.”