To date, the ECB has held back from using more financial firepower to fight the debt crisis, fearing that doing too much would rob the incentive from indebted countries such as Greece and Italy to change their profligate ways and force through deep economic policy changes. But citing heightening economic risks, the ECB’s president, Mario Draghi, hinted that the bank could act to contain the crisis if euro-area nations quickly embrace a historic fiscal pact.
European leaders are scrambling to rush forward such a deal for unveiling at a summit late next week, one that could ultimately see nations such Italy, Spain, France and Germany effectively forfeit full independence over national budgets and potentially give their neighbors the right to slap penalties on big spenders. French President Nicolas Sarkozy said Thursday that Germany and France would present their vision for an agreement Monday.
In the parlance of central bankers, whose words are read like tea leaves, Draghi said that a pact is “definitely the most important element to start restoring credibility.” He suggested that “other elements might follow” if a deal were reached, which observers took to mean more-aggressive bank action, such as a program to reduce borrowing costs for troubled nations and relax lending rules for ailing banks.
If Draghi is marking a policy shift, it could put the central bank on a collision course with its largest member, Germany. A bloc of nations, including France, is in favor of using an agreement to help clear the way for more-aggressive ECB action. But fiscally conservative Germany has remained steadfastly opposed to a more ambitious role in the crisis for the ECB, an independent body governed by an executive board made up of delegates from nations that share the euro.
In an address to supporters Thursday, Sarkozy acknowledged that the ECB must remain independent. But, he added, it also must live up to its responsibilities to help fight the debt crisis. In a hint that the bank may have already decided to accelerate aid for troubled governments, he said, “I am certain the bank will live up to its responsibilities. In fact, I am happy to say it already has.”
ECB action is considered key to a speedy solution to a crisis that European leaders have failed to quell for more than two years. Though a fiscal agreement could solidify the foundations of the euro in the long run, putting one together will take longer than the weeks or months the region might have left to calm jittery investors and prevent a full-scale economic collapse in countries such as deeply indebted Italy. The ECB, meanwhile, could act fast.
It remained unclear whether the central bank would truly operate contrary to the wishes of Germany, its most powerful member, or instead find heightened ways of acting that would not unsettle the government in Berlin too deeply.
Reflecting Germany’s general monetary stance, the ECB is notoriously conservative, focused more on controlling inflation than spurring growth. Its strictures additionally limit the scope of what the bank can legally do, with its bylaws, for instance, prohibiting it from directly bailing out countries.
But it has more options than it has thus far chosen to use. Analysts say the most likely option is that the ECB will launch a new buying spree of troubled debt from countries in a bid to bring the price of their bonds down from unsustainably high levels and stem the risk of default.
Draghi was characteristically vague Thursday, at one point saying the ECB might have “limited” room to launch a massive bond purchasing program. But his words were still being interpreted as a sign that the ECB would at least escalate from an existing program in which the bank is buying a relatively small amount of troubled European debt.
The ECB could take other measures, including relaxing the terms on which it lends to European banks, helping to shore up the troubled financial system in Greece and other hard-hit parts of Europe. In addition to warning of heightened risks to the region’s economy, Draghi on Thursday acknowledged the woes of those banks.
Much hinges on exactly what kind of fiscal pact European leaders might agree to next week.
Guntram Wolff, deputy director of the Brussels-based think tank Bruegel, said the many options included a surrendering of independence over national budgets. Such a move could allow for the issuing of regional “euro bonds” — much like U.S. Treasurys — that would ensure that “if Greece doesn’t pay its bills, then the German taxpayer will.”
German Chancellor Angela Merkel, however, reiterated her opposition to euro bonds in an interview Thursday with the Westdeutsche Zeitung newspaper.
In his address, Sarkozy did not offer details of the French-German proposal, which, according to reports in Paris, is still being negotiated. But the changes, he said, must be radical enough to restore confidence. Otherwise, the pressure from the mounting debt crisis could destroy the currency union.
“Europe is not a choice; Europe is a necessity,” he said. “If Europe does not change fast enough, history will be made without Europe.”
Correspondent Edward Cody in Paris contributed to this report.