Mario Draghi’s Big Moment, Continuedby
Europe emerges from its summer torpor with untapped disasters in waiting.
On Thursday, attention turns to Mario Draghi, the president of the European Central Bank, and the plans, if any, he will announce to help manage the European Union’s financial crisis. Next, on Sept. 12, Germany’s constitutional court will rule on the legality of the European Stability Mechanism, the euro area’s new permanent bailout fund, and the fiscal pact that curbs government deficits. If either event goes badly, watch out.
In July, Draghi aroused expectations that he has so far been unable to meet when he promised the ECB would do “whatever it takes” to defend the euro system. This was seen as a pledge of unlimited bond buying aimed at lowering the long-term interest rates that Spain, Italy and other distressed sovereign borrowers must pay.
We have been recommending such a course for months. But it turned out Draghi’s promise was less a binding commitment to the markets than an attempt to nudge dissenters on the ECB’s governing council -- notably, Bundesbank President Jens Weidmann, who opposes an unorthodox bond-buying program on principle -- to fall into line. They didn’t.
Thursday will show whether Draghi has finally reached agreement with the dissenters, so that some kind of compromise effort can proceed, or whether he has to play for time yet again.
A muddled compromise might neutralize any new ECB initiative at the outset. Bloomberg News reports suggest that Draghi will announce a program of unlimited but sterilized bond buying, meaning that the ECB would ensure its bond purchases didn’t increase the euro area’s money supply. Depending on the details, that approach wouldn’t neutralize a bond-buying program, but it would blunt the effect, partly by causing confusion. The bank needs to impress investors with the scale and clarity of its commitment: The bigger and bolder the promise, the smaller the actual intervention will need to be.
As for doing it now or later, the EU has had extraordinary luck in fending off an outright economic collapse this long. Still, there are limits to the market’s patience, and it is best not to test it further.
Critical though this week’s ECB announcements may be, they could soon be overshadowed by Germany’s constitutional court. If it decides that the permanent bailout fund is illegal -- the question is whether it violates the EU treaty’s “no bailout” clause, which bars member states from assuming one another’s debts -- it would disable a vital component of Europe’s financial defenses.
The bond-buying plan that Draghi has apparently been preparing includes the condition that governments seeking ECB support have an agreement -- possibly including spending cuts, tax increases and market reforms -- in place with the European Stability Mechanism, and that they are abiding by its terms. That’s not a good idea; it builds in further delay and uncertainty. However, it might be politically necessary. Angela Merkel, Germany’s chancellor, has tacitly endorsed that approach. But if the court strikes down the ESM, the emerging compromise on ECB action goes down, too.
German legal experts doubt the court will simply throw out the ESM and fiscal pact. But the court could decide that the German constitution has been stretched as far as it can be, and any further European integration would require an amended constitution and a referendum to validate it.
We are tempted to argue that a referendum on Europe’s future is exactly what Germany needs. It would force Merkel to put choices squarely before voters, a responsibility she has shirked up to now. The danger, again, is further delay.
A sweeping agreement is urgently needed to stabilize the European economy, one that covers ECB support and fiscal cooperation and takes steps toward a banking union. Achieving that requires working within the existing constitutional apparatus.
The worst thing would be for the court to throw the euro area into turmoil by simply blocking the ESM. Precisely because the stakes are so great, it is unlikely to do that. The middle way would be to let the ESM stand for now, while pushing Europe back to the constitutional drawing board soon. That would be justified on the constitutional merits, and would start a debate that Europe’s citizens should have engaged in long ago. The problem is, at a time of acute anxiety, it’s another signal of hesitation and confusion.
Designing, approving and ratifying a new set of European treaties would take not months or weeks but years, if it could be done at all. That’s an exercise for calmer times. For now, crisis management is the order of the day.
On balance, we hope the court simply takes itself out of the picture by letting the pact and the ESM stand. Meanwhile, Draghi’s task is to surprise the markets, for once, by delivering more, not less, than expected.
To contact the senior editor responsible for Bloomberg View’s editorials: David Shipley at email@example.com.