Europe finally gets its own version of the Federal Reserve as Lagarde vows to do 'as much as necessary' to save the eurozone
The meltdown in vulnerable bond markets has at last forced the European Central Bank to act seriously. The €750bn bazooka fired late on Wednesday三级成人视频 night has prevented dangerous debt dynamics from spinning out of control altogether.
It is a watershed moment in the turbulent story of the euro. The ECB is stepping up to its proper role as a lender-of-last-resort, compelled yet again by fast-moving events to rescue monetary union – and the European Project itself – after the failure of EU states to come up with a coherent economic response to Covid-19.
三级成人视频This time it is tearing up the rule book entirely, announcing that it will not be bound by “self-imposed limits”. It will intervene in the sovereign debt markets wherever needed most – meaning that it can deploy its vast arsenal to defend Italy or Portugal – without strict conditions or ifs and buts. It has vastly expanded the range of assets on the menu. It will do “as much as necessary and for as long as needed”.
Risk spreads on Italian 10-year bonds instantly halved after flirting with disaster on Wednesday. The Club Med bloc can breathe an immense sigh of relief. The Stoxx euro 600 bank equity index has stopped plummeting (but not really rebounded). The bank/sovereign "doom loop" – each dragging the other down into a self-feeding vortex – has been averted.
U三级成人视频nder the Pandemic Emergency Purchase Programme the ECB will buy commercial paper and will relax rules to let banks submit small business loans and even letters of credit as collateral.
The shock and awe intervention follows a disastrous week of gaffes, miscues, and deep divisions, with Austria’s member seeming to throw up his hands on Wednesday, stating that the ECB had run out of ammunition and could no longer do much to help. He added for good measure that Schumpeterian三级成人视频 “creative destruction” has its uses and that “every economic crisis is a cleansing”.
It also ends a vertiginous high-stakes game of institutional brinkmanship where ECB refuseniks were digging in their heels, trying to force the EU’s political leaders to stop dodging their primary responsibility in this crisis.
三级成人视频Although even on this point different factions in Frankfurt had different objectives. The southern debtor bloc was pushing for fiscal union, while the northern creditor bloc instead eyeing fiscal bail-outs on draconian terms, ultimately with a sovereign debt haircut for Italian savers. That agenda was described by the former IMF chief economist Olivier Blanchard as nothing less than “criminal” in the current circumstances.
The ECB package arguably flouts EU treaty law and may face challenges in Germany’s top court. The bank’s new president Christine Lagarde took the fateful decision of forcing it through by majority vote last night – and damn the torpedoes.
While Frankfurt needs the fig-leaf of stating that the €750bn blitz is to ensure “the smooth transmission of its monetary policy in all jurisdictions of the euro area”, it is clear that the ECB is in reality acting to prevent the collapse of Italy's sovereign debt, which in turn would set off a Club Med chain-reaction within hours and blow up monetary union.
It took 20 years but the eurozone finally has its own version of the US Federal Reserve. Or as founding father Jean Monnet famously put it, “Europe is forged in crises”.
T三级成人视频he intervention heads off a parallel push for "corona bonds", or precautionary credit lines financed by the eurozone bailout fund. This was a bureaucratic dog’s dinner and would have required the backing of the Dutch and German parliaments under tough conditions.
The delay and toxic terms would have further poisoned the atmosphere after the bitter divisions over the pandemic, where it has so far been every man for himself, sauve qui peut.
For German Chancellor Angela Merkel, the path of least resistance is to let the ECB do the job and keep up the fiction that this is just about monetary plumbing. But not everybody in Germany agrees. This controversy will come back to bite.
The ECB could no longer wait. Italy’s real borrowing costs had jumped by 170 basis points in a matter of days. A ferocious credit crunch was taking hold. This was happening as analysts began to talk of a 15pc contraction in eurozone GDP in the second quarter. There are suggestions that Covid-19 will ultimately raise Italy’s debt-to-GDP ratio by 20 percentage points to well over 150pc.
三级成人视频Had there been any further day, the ECB would have been presiding over the near-certain collapse of peripheral bond markets, a cascade of defaults, and financial conflagration.
While Lagarde has averted the worst, the ECB’s actions are not in themselves stimulus. They amount to a firewall.
三级成人视频Monetary policy has no traction against an economic "sudden stop" caused by factory closures and lockdowns. Interest rates are in any case at minus 0.50pc already, and QE is a blunt tool when the yield curve is flat across the core eurozone bond markets.
三级成人视频It will take a vast New Deal of actual spending to lift the region out of the Covid-19 slump and head off an intractable deflationary depression. Europe’s leaders and their treasuries are not off the hook yet.