Update: The ECB agreed Thursday to launch a new bond-buying program to help shore up eurozone economies struggling with debt, according to Reuters.
As Eurozone member states move to confront the continent’s enduring debt crisis amid a tightening recession, summer’s end may herald the onset of an autumn for the common currency itself. Over the next six to eight weeks, European Union officials and national governments will be forced to make choices in the battle to contain the financial emergency that could drive borrowing costs for cash-strapped member states beyond reach.
The first high-stakes decision date comes Thursday, when European Central Bank (ECB) president Mario Draghi announces results of the bank’s Sept. 6 policy meeting. Markets are looking to Draghi to outline activist measures to defend debt-swamped euro members from rising borrowing prices — and in so doing demonstrate that further betting against the currency’s survival is a losing position.
In July, Draghi had attempted to do just that, promising the ECB would ”do whatever it takes to preserve the euro”. Yet, when he got the opportunity to deliver on that promise following the bank’s policy huddle in August, Draghi’s conspicuous lack of specifics gave markets the chills. The resultant investor fears sent borrowing rates soaring for big, vulnerable euro members Spain and Italy — and raised the stakes for Thursday’s meeting, which is now widely viewed as a decisive moment for the very survival of the currency amid Europe’s darkening economic outlook.
Evidence suggests Draghi is well aware that action can no longer be postponed.
According to press reports based on leaked comments from Draghi’s closed-door address to the European Parliament Sept. 3, the ECB chief said the bank would take action in secondary markets by purchasing short-term bonds of euro members exposed to the worst interest-rate pressure. Apparently anticipating critics — most notably in Germany — who frequently oppose market intervention by the ECB as violating the limits of its mandate, Draghi reportedly described the short-term bond purchases as inherent to the ECB’s mission of controlling inflation and price rises, including on borrowing.
“We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country, or two countries at most,” said Draghi, according to a recording of his speech published by Italian news service AGI. “(This is) a way to comply with our primary mandate… Frankly, all this also has to do very much with the continuing existence of the euro.”
Emphasis on short-term bonds is intended to keep the ECB and euro zone intervention funds tied up for briefer periods than taking longer debt positions would involve. But the strategy is also intended to squelch protest from some critics that healthier euro members have already risked too much to help out debt-blighted partners such as Greece, Italy, Spain, and Portugal. One of the loudest skeptics has been German central bank chairman Jens Weidmann, who in August reportedly threatened to resign from the ECB board should Draghi adopt any new bond-buying plans. It’s unknown how Weidmann will respond if, as expected, Draghi plows ahead with that strategy on Thursday.
But even if Draghi manages to intervene in the markets without losing Weidmann, politics could yet complicate the euro’s existential plight. Weidmann is just one of many officials in Germany hostile to taking on increased risk in order to bail out troubled currency partners. Though once similarly skeptical, German Chancellor Angela Merkel has recently pushed for greater support of endangered euro members. But on Sept. 12, Germany’s constitutional court rules on the legality of the European Stability Mechanism (ESM) created to overcome the fiscal crisis. Were the court to deem illegal under German law the pact’s permanent rescue fund for debt-crushed members, panicked market reaction to the resulting uncertainties could prove fatal to the euro. Even if the constitutional court accepts the legality of the ESM, German political opponents to the pact will likely push for a referendum on additional financial aid to sick euro partners — a proposition that German voters may well reject.
The euro faces an autumn of discontent beyond Germany, too. Though French President François Hollande successfully campaigned on his opposition to the EU fiscal pact backed by predecessor Nicolas Sarkozy earlier this year, he’s now calling on his leftist majority in parliament to ratify it in an October vote. Hollande argues his main criticism of the pact — that it imposed ruthless austerity that only exacerbates deficit and debt problems by undermining growth — was remedied in June by the addition of a $162 billion stimulus spending component.
Still, members of allied leftist parties — and even figures in Hollande’s own Socialist Party — continue to denounce the pact as codifying the austerity dogma. They are particularly opposed to the “golden rule” measure insisted on by Merkel and embraced by France’s former conservative government. That rule sets a legal limit on national budget deficits, and establishes punishment procedures for violations. Leftist detractors are vowing to defeat the pact’s ratification — a move minority conservatives could assist by abstaining in order to further weaken Hollande.
The French prime minister is confident he’ll get sufficient backing from his Socialist majority to obtain passage—though nothing’s a given with France’s division-prone left. Indeed, Hollande himself remains scarred by the trauma of the bitter split in Socialist ranks under his leadership in 2005 over the referendum on a proposed EU constitution. That measure was defeated — derailing the constitution drive across Europe — thanks to effective “No” campaigning by leading Socialist dissenters.
French legislative defeat of the fiscal pact — like a thumbs-down court ruling in Germany — would, at the very least, plunge the euro into a new spasm of crisis. Like Merkel and Draghi, Hollande is deeply committed to the EU, and insists he’ll do whatever is required to save the common currency. Those vows are likely to be severely tested in the coming weeks.