It has been quite the week in the ongoing euro area financial crisis. Last week, the ECB translated Mario Draghi’s assertion that the “euro is irreversible” into a bond buying program — albeit conditional on EU governments and countries under financial stress (such as Spain) agreeing on certain fiscal objectives and possibly other reforms.
This week, the German Constitutional agreed on the Constitutionality of the Treaty that creates the European Stability Mechanism better known as the ESM. Since the Maastricht and successor Treaties prevent direct lending from the ECB to member states, the Europeans devised arrangements that give the appearance that the original intent of the Treaty was maintained.
Finally, the EU Commission published a roadmap for how EU banks would be supervised. The fact that the EU includes no euro area member states poses a difficult governance problem and, in typical EU fashion, a complicated solution is contemplated. In any event, the ECB would become the single supervisor.
Lost in the flurry of announcements is the fact that EU President Barosso’s State of the Union also called for a ‘federation of states’ and that the banking union would also involve a harmonization of existing deposit insurance schemes.
Also lost in the excitement that the ESM can proceed is the fact that the German Constitutional Court has not ruled definitively on either the fiscal compact or if the legality of the ECB’s bond buying scheme should be assumed.
Indeed, what seemed to make the headlines was the vote against the ECB’s action by one single central bank, namely the German Budesbank. The isolation of, arguably, the most important central bank in the euro zone stems from the ECB’s latest policy move, dubbed ‘outright monetary transactions,’ as being “…tantamount to financing governments by printing banknotes,” threatens new divisions in the euro zone likely to have been percolating for some time.
So, do these events improve the survival of the euro zone? At the very least, the belated recognition that the EU’s supra-national institutions are incapable of dealing with the economic problems of the Southern Periphery (and let’s not forget Ireland) delays any eventual break-up. Nevertheless, what is striking about the media’s reporting of these events is not that the policy makers finally have a handle on the challenges facing them. Instead, one reads over and over again about the sense of “relief.”
Somehow, relief and solutions to the problems of the eurozone do not sound like the same thing to me. Indeed, a closer look at what has transpired over the past few days suggests more drama to come.
First, Greece remains an unlikely candidate for survival in the single currency area although we will see in the coming weeks what the international “troika” (EU Commission, ECB, IMF) will have to say. Then Spain continues to insist that it will not need to apply for support through the ESM. Doing so not only invites the intervention of the troika but also sends a signal that the recently elected government in that country is unable to solve the crisis left by the previous government. It’s a version of the age old ‘lender of last resort’ wherein, in this case, a coutry asks for help when it's essentially too late. Third, Ireland asks for relief (without much luck so far) from a badly organized intervention by the ECB, and others, which has left the country on an unsustainable debt path.
However, possibly the dark horse in all this is whether the public, through the ballot box, will vote over time to reject the top-down approach to policy making by institutions that have dubious credentials for meeting the standards of democratic accountability. Some, of course, will point to the recent elections in the Netherlands where ‘pro euro’ parties have won. However, I suspect that the election outcome in that country is as much about the inability of the anti-euro parties to explain what would replace the euro and how such a regime would work than any firm belief in the superiority of the single currency. As long as Europeans believe that the alternatives are worse, the euro will survive. However, this does not amount to a vote of confidence in the euro or its policy makers.