The coordinated confidence-inspiring words from the Eurozone’s fearless leaders yesterday and today about doing whatever it would take to save the euro wasn’t about Greece anymore. Its life support may get unplugged in September. Politicians have apparently given up. The tab isn’t that dramatic: default and return to the drachma would cost Germany €82 billion and France €62 billion (Ifo Institute PDF). Survivable.
The fearless leaders were afraid of Spain, whose vital signs were deteriorating. Unemployment hit 24.6%, worse than Greece’s 22.5%. In the southern region of Andalusia, it rose to a mind-boggling 33%. Youth unemployment (16-24) set a sobering record of 53.3%. Even more worryingly, in a country where family solidarity and multi-generational households are the norm, the number of households where no one worked climbed to 1,737,000. So, in the first half of 2012, over 40,000 Spaniards emigrated—up 44% from last year. Instead of consuming and producing in Spain, they took their education that society had invested in and sought their fortunes elsewhere.
Despite repeated assurances that Spain would not need a bailout other than the €100-billion bank bailout, Spanish Economic Minister Luis de Guindos flew to Berlin to meet with German Finance Minister Wolfgang Schäuble … to discuss a bailout. For €300 billion. And hours beforehand, “sources” told the Spanish media that if Spain didn’t get its wish list, whose top item was a massive bond-buying program by the ECB to force Spain’s borrowing costs down, Spain would consider “more forceful measures.” Because Spain had no money to meet its obligations in October, it would have to default! The D-word made into print. A scary message for the fearless leaders of the Eurozone.
It worked! Thursday, European Central Bank President Mario Draghi caved: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Emphasis on believe me—as in “I beg you, please believe me”—because the other part of his pronouncement, within our mandate, is controversial. It’s where the ECB had clashed with the German Bundesbank and others who stubbornly clung to the notion that the treaties governing the ECB gave it only one mandate: price stability. Not propping up stock and bond markets.
Draghi outlined a way around that single-mandate limit: if high borrowing costs for certain countries “hamper the functioning of the monetary policy transmission channels, they come within our mandate,” he said. In other words, every time yields go up somewhere in the Eurozone, the ECB is free to “do whatever it takes” to force them down.
On Friday, with the D-word still hanging heavily in the air, German Chancellor Angela Merkel and French President François Hollande talked on the phone—for the first time? A call that was ballyhooed to the media. They were “fundamentally attached to the integrity of the Eurozone” and were “determined to do everything to protect it.”
Then it bubbled up that the ECB might take concerted action with the States to lower the cost of borrowing for Spain and Italy, though it might take a few days or weeks to finalize the mechanisms. According to “sources,” the ECB could re-launch its program of buying Spanish and Italian bonds in the secondary market. The EFSF bailout fund and its successor, the ESM, could be used to buy Spanish or Italian debt in the primary markets. And the ECB could take Fed-like action if the ESM were given a banking license. It would allow the ESM to borrow from the ECB and then buy debt in the secondary and primary markets. There would be “no taboos,” Draghi said. Debt crisis solved.
He’d thrown down the gauntlet. The ECB’s moderate bond-buying program last year caused a stir in Germany. ECB Council Member (in line to be its next President) and Bundesbank President Axel Weber, who’d been overruled, resigned from both jobs over it. ECB chief economist Jürgen Stark retired in protest. Politicians launched attacks against the ECB, among them Frank Schäffler (FDP) who’d said, “If the ECB continues like this, it will soon even buy old bicycles.” In March, the ECB stopped the bond buying program.
A restart would be “problematic,” a Bundesbank spokesperson said dryly. On the other hand, the Bundesbank considered it “not problematic” if the EFSF bought Spanish debt. Hurdles remain. Such action would have to be approved by the Bundestag’s “Group of Nine” whose representatives are on vacation. And Spain would have to formally request a bailout before the EFSF could buy its bonds—but Spain is still denying that it’s even discussing a bailout. It would be the sixth of seventeen Eurozone countries to be put on life support.
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