Another relief for the European crisis

With the ending of the vacation season Europe is going through an economic tailspin. Unemployment in Greece is 24.4 percent while capital flight from Spain is accelerating and barter is spreading and the rate growth of Italy has become negative. Even in France, which is thought to be one of the strong economies of Europe, unemployment levels surmount 10 percent. None of the summits that the leaders of Europe have held, or the plans they have announced seem to have ended the constant decline of the continent.

Here is the latest action of the European Central Bank. On Thursday, Mario Draghi, the ECB president, announced that it will purchase short- and medium-term government bonds of troubled countries, most probably from Spain and Italy. In this way the bank will reduce their financing costs. The ECB will compensate these purchases by selling other securities on its balance sheet. In other words it will “sterilize” its bond purchases and will prevent inflation. As a result, the ECB has offered to replace the private credit markets as a source of cash for these debt-swamped countries. This will relieve them of the insolvency threat imposed by the bond market.

However, the intentions of the ECB are not to just give the money away. The countries which apply for relief must carry out specific restructuring measures to ensure their long-term ability to pay. This means that the ECB is taking the bailout role of the International Monetary Fund. It will do that by substituting its unlimited capacity to print money for the large but limited reserves of the fund. The representative of Germany on the ECB voted against the plan since he considered it a violation of the German taboo against central-bank debt financing. However, the German government headed by Angela Merkel seems to have accepted the program of Mr. Draghi after much negotiation.

Simply said, ECB money-printing threatens the wealth of Germany since Berlin would have to put taxpayer money into the central bank to compensate losses if Spain and Italy ultimately default on the bonds it’s buying now.

Germany profited from the credit boom in southern Europe and now it should suffer the consequences of the credit crunch along with everyone else. Moreover, as the ECB is enlisted as a de facto lender of last resort within the euro zone, the currency union is provided with a reliable back-up strategy that it lacked before. The question that remains is whether this is a long-term solution, unlike the previous plans Europe’s leaders have floated. Certainly, the ECB has bought a bit more time for the debt-swamped nations to carry out structural reforms. Unfortunately, those nations have shown neither capability nor willingness to take advantage of that time. As a result, the latest plan can only relieve, but can not solve, the crisis in Europe.