AS ITS ANNUAL vacation season ends, Europe is sinking into an economic bog. Unemployment in Greece is 24.4 percent; capital flight from Spain is accelerating and barter is spreading; Italy’s growth rate has turned negative. Even in France, thought to be one of Europe’s economic pillars, unemployment tops 10 percent. Though Europe’s leaders have held summit after summit, and announced one plan after another, nothing they have done seems to have ended the continent’s frightening decline.
Now comes the latest proposed fix, from the European Central Bank. Bank President Mario Draghi announced Thursday that it will buy short- and medium-term government bonds of debt-swamped countries — most notably Spain and Italy — thus reducing their financing costs. The ECB will offset these purchases by selling other securities on its balance sheet, thus “sterilizing” its bond purchases and preventing inflation. The upshot is that the ECB has offered to replace the private credit markets as a source of cash for these troubled countries, thus relieving them of the threat of bond-market-imposed insolvency.
There is a catch: The ECB won’t just give the money away. Nations must apply for relief, in return for carrying out specific restructuring measures to ensure their long-term ability to pay. In that sense, the ECB is stepping into the bailout role of the International Monetary Fund (which hailed the plan), substituting its unlimited capacity to print money for the fund’s large but limited reserves. Though Germany’s representative on the ECB voted against the plan as a violation of the German taboo against central-bank debt financing, the German government headed by Angela Merkel appears, after much negotiation, to have acquiesced in Mr. Draghi’s program. No matter how you slice it, ECB money-printing puts German wealth at risk; Berlin would have to put taxpayer money into the central bank to offset losses if Spain and Italy ultimately default on the bonds it’s buying now.
Well and good. Germany profited from the credit boom in southern Europe; it should have to share in the cost of the credit bust. Furthermore, enlisting the ECB as a de facto lender of last resort within the euro zone provides that currency union with a key fail-safe that it had heretofore lacked. The question, though, is whether this is any more of a long-term solution than any of the previous plans Europe’s leaders have floated. We’re hopeful but skeptical. Certainly, the ECB has bought Europe’s debtor nations a bit more time to undertake structural reforms
. Alas, those countries have not yet shown a capability or willingness to use time wisely.
In that sense, the latest plan relieves, but does not solve, Europe’s