ECB head Mario Draghi wants to save the euro at all costs. But the pledge has created discord within the bank's governing council. Many oppose plans to buy up sovereign bonds from troubled euro-zone member states, fearing it could just make things worse, Spiegel Online reported in an analysis.
It was an illustrious meeting that British Prime Minister David Cameron was hosting on the evening before the opening of the Olympic Games in London. Prince Charles joked with International Monetary Fund Managing Director Christine Lagarde, while top chef Tom Aikens served up Scottish salmon and Yorkshire goat cheese. The heads of global corporations like Google enthusiastically applauded the videotaped appearances of English celebrities, from Victoria Beckham to Richard Branson.
It was meant to be a day of glamour, but then Mario Draghi, the president of the European Central Bank (ECB), made a seemingly trivial remark -- but one that ensured that the 200 prominent guests were swiftly brought back to gloomy reality. His organization, he promised, would do "whatever it takes to preserve the euro."
The audience treated the remark as just another platitude coming from a politician. But international financial traders understood it as an announcement that the ECB was about to buy up Italian and Spanish government bonds in a big way. So they did what they always do when central banks suggest they might soon be firing up the money-printing presses: They clicked on the "buy" button.
Stock and bond prices shot up within minutes, and the yields on some southern European debt securities saw a considerable drop. Newspapers and online news services called it an act of liberation, and market speculators quickly concluded that the ECB was apparently prepared to provide them with what one banker called "excellent gains in share prices" in the coming months.
Meanwhile, experts at the central banks of the euro zone's 17 member states had no idea what to do with the news. Draghi's remark was not the result of any resolutions, and even members of the ECB Governing Council admitted that they had heard nothing of such plans until then.
Europe's leaders, on the other hand, reacted with relief. The situation on the financial markets had come to a head in the preceding days, and Spain, in particular, was coming under more and more pressure. German Finance Minister Wolfgang Schäuble demonstratively supported Draghi's announcements, and both German Chancellor Angela Merkel and French President François Hollande repeated the words of the ECB president almost verbatim. Germany and France, they announced in a joint statement, would do "everything to protect the euro zone."
This comes as no surprise, given that their own recent efforts haven't exactly been crowned with success. Although the latest euro summit in Brussels had delivered copious statements of intent, it yielded almost no concrete resolutions. As a result, the risk premiums for Spanish government bonds quickly shot up again to reach record levels.
Now Draghi is apparently prepared to lend a hand to the hapless politicians. Under his plan, which essentially creates a new form of cooperation between governments and monetary watchdogs, both of Europe's bailout funds -- the temporary European Financial Stability Facility (EFSF) and the permanent European Stability Mechanism (ESM) -- and the ECB will intervene jointly in the bond markets in the future to bring yields down.
What sounds like a great success is actually a sign of weakness. If the ECB starts buying up the government bonds of highly indebted euro countries again, it won't just be yielding to the pressure of European politicians. It will also be resorting to a tool that, in the most recent past, has primarily produced one outcome: discord within the ranks of the ECB. As Germany's central bank, the Bundesbank, noted last week, Draghi's proposal is a "problematic" instrument. Read more.
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