The writer is the author of ‘Crashed: How a Decade of Financial Crises Changed the World’
“Whatever it takes” is the mantra of the moment. Hammered out to an audience of Eurosceptic hedge fund managers at the height of the 2012 eurozone crisis by Mario Draghi, then president of the European Central Bank, the words have come to stand for the technocratic determination to meet a crisis with all necessary force.
It should be no surprise that the phrase is enjoying a renaissance in 2020. Faced with the Covid-19 pandemic, we need brave talk. The irony is that when Mr Draghi first uttered the assurance it was less a confident assertion than an act of defiance. The ECB did not have the licence to act. Nor did he have the approval of his own team in Frankfurt. Instead, he gambled that the intensifying pressure of the crisis would forge the eurozone into a truly integrated fiscal and financial unit. In such a system, the ECB could then graduate to being the sword and shield of the euro.
Eight years on, the coronavirus crisis is exposing how ambiguous the outcome of his wager on Europe remains.
“Outright monetary transactions” — the ECB policy most closely associated with Mr Draghi’s promise — is a power festooned with conditionality. It was crafted to soften the resistance of northern European conservatives, above all in Germany. To trigger the ECB’s power to buy sovereign debt under OMT, a country must first have been granted a rescue programme from the European Stability Mechanism. This would need a unanimous vote from all eurozone members, which gives Germany a veto.
For the distressed borrower, the conditionality this implies would be humiliating. Mr Draghi never had to put OMT into effect and, even now, no one wants to invoke the mechanism to support the stressed states in the pandemic.
It is precisely for that reason that nine heads of government, led by France, Italy, Spain and Portugal, have proposed mutualised “coronabonds”. This is a proposal that has been made repeatedly since 2010. It has long had the support of the ECB, which wants a sensible balance between fiscal and monetary policy. A common bond would be the foundation of a fiscal apparatus to match the scale of the currency union. Faced with a common crisis such as Covid-19, it is more warranted than ever.
But the opposition of the northern states is adamant. As they have shown in recent weeks, they are determined to resist the idea even if it causes an open breach with their European partners.
It is possible that some complex compromise can be worked out that will allow the common rescue fund, the ESM, to serve as the basis for borrowing. It is also possible that the European Commission may gain acceptance for its proposal of a joint fund to support unemployment and short-time payments across the continent. But the moment for an impressive display of common resolve has passed. Faced with the urgency of the crisis, the eurozone can offer nothing like an adequate programme of common public spending.
Instead, crisis-fighting has been left to a lopsided combination of national fiscal policy and bond buying by the ECB.
Mr Draghi began quantitative-easing-style bond-buying in 2015 not as a rescue measure for any single country but as a general support for the eurozone. To ward off accusations of favouritism, purchases are regulated according to a strict quota system. Faced with this pandemic, after initial hesitation and some wrangling within the bank, bond buying has been ramped up to a massive scale and quotas have been loosened.
This is justified by the overriding priority of maintaining the coherence of the monetary system and thus the effectiveness of the ECB’s monetary policy. It may serve as a legal fig leaf, but it does not convince the economic nationalists who oppose coronabonds. Their central obsession is that the bank should not be used to finance national borrowing, which is explicitly prohibited by its founding treaty.
Whenever the ECB has bought bonds before, as in 2015 and 2019, they have protested. And their protests are likely to be all the more fierce now because the ECB is for the first time buying bonds while governments are engaged in gigantic fiscal spending.
For those who embrace European solidarity and view macroeconomic policy in pragmatic terms, as a means of maximising production, employment and welfare, combining fiscal expansion with monetary support is the whole point. The ECB’s interventions are calming the markets and buying time. The current makeshift arrangements are better than nothing. But the risk is that without a clearly defined fiscal framework, the most vulnerable states will not dare to spend enough.
So far Germany’s national stimulus is far greater than that Italy’s or Spain’s, even though their medical emergencies are more urgent. Were they to spend more, what assurance would they have that once the crisis passes the burden on their national balance sheets will not be made into a crippling constraint for decades ahead? The straitjacket of austerity imposed on the eurozone after 2012 taught a harsh lesson.
Mr Draghi made his promise against the optimistic horizon of European progress towards closer fiscal and financial integration. Without that prospect, “whatever it takes” is at best a recipe for makeshift. At worst it is a mockery.
