After High Note for Euro Plan, Discord Emerges

Share with others:


Print Email Read Later

PARIS -- In the long euro crisis, there is almost always a sobering morning-after whenever European leaders appear to have made a major breakthrough. And so it went again on Friday.

Greeted with initial fanfare by investors and economic officials, the unlimited bond-buying plan that the European Central Bank president, Mario Draghi, announced Thursday ran into immediate political problems in the crucial countries of Germany, Spain and Italy.

In Germany, despite Chancellor Angela Merkel's support for Mr. Draghi and the independence of the Central Bank, political and news media reaction was scathing, with accusations that the bank, in seeking to stabilize the euro currency union, was subverting its mandate to fight inflation and forcing debt upon euro zone members.

"A Black Day for the Euro," "Over the Red Line" and "Pandora's Box Opened Forever" were some of the German headlines, with the normally sympathetic Süddeutsche Zeitung headlining an editorial: "The E.C.B. Rewards Mismanagement." Even the German Bundesbank, officially part of the European Central Bank, put out a statement commenting acidly that the plan was "financing governments by printing bank notes."

At the same time, the two intended beneficiaries of the Draghi plan -- Spain and Italy -- expressed reluctance to ask the bank for help, even if both might eventually have little choice but to seek aid. The governments in Madrid and Rome apparently fear the political impact at home of bowing to whatever demands for harsh economic policy changes might come with the aid.

They seem afraid that the medicine might prove worse than the disease, because Mr. Draghi made it clear that there would be no bottomless well of money made available without a program of greater spending discipline.

"Those who did everything to have the E.C.B. help now say they don't want it," Ferruccio de Bortoli, editor in chief of the newspaper Corriere della Sera, said in a Twitter message. "Speculation will play on this contradiction."

The disjunction between how officials seek to placate the lightning-fast markets and the reluctance on the part of the public and politicians to make further sacrifices and move at more than a glacial pace highlight why it has proved so difficult for Europe to overcome the challenges that still threaten to tear apart its 17-nation currency union.

The point of the new bank program is to ease interest rates on the bonds of Spain and Italy, the third- and fourth-largest economies in the euro zone after Germany and France, by reducing investor speculation against the future of the euro itself. High rates threaten to bust their budgets, but also to make it all but impossible to raise money in the financial markets.

If Spain and Italy cannot go to the market to finance their debt, then they could need full bailouts by a European Union whose rescue funds are simply too small. So keeping interest rates down for Spain and Italy is a vital part of any euro rescue plan. It is also necessary to buy time for European politicians to make the difficult political decisions to achieve the fiscal and banking union that is the longer-term answer to the structural problems of a common currency without a common treasury.

So far, investors are continuing to bet on Mr. Draghi. Interest rates on the bonds of Spain and Italy fell significantly on Thursday and Friday, after an upward swing in the value of stocks and the euro on Thursday.

The next test for the euro is on Wednesday, when the German constitutional court is expected to rule on the soundness of the permanent European bailout fund, the European Stability Mechanism, that would finance much of the bond buying under the Draghi plan.

More challenges lie ahead. Despite the reluctance of the Spanish prime minister, Mariano Rajoy, to risk the stigma of seeking help -- beyond the money Europe has promised to help prop up Spain's most troubled banks -- he is expected to nonetheless make such a request before the end of October.

Spain must pay back 20 billion euros, about $25.6 billion, in bond redemptions in October. And some analysts suggest that Mr. Rajoy will need to seek help to satisfy half of Spain's 180 billion euro financing needs (about $230 billion) over the next year. "The Spanish fear is that they become another Greece -- that they will have to chop off their right arm for a blood transfusion," said Mark Cliffe, chief economist at ING Bank in Amsterdam.

But some European officials suggest that Spain has already done a lot to clean up its books -- more than Italy has done, certainly -- and that any new conditions might not be much more onerous, especially in a period of such deep recession and political backlash against austerity. Mr. Rajoy is already losing popularity rapidly, and no one wants further political instability in Spain to add to continuing anxieties over Greece.

Italy is a less urgent case. Prime Minister Mario Monti, a respected economist, had been pushing for a European Central Bank program as a safety net. But he is loath to accept the terms that might now be required because of their potential to choke off economic growth and because of Italy's own complicated political scene. The country's ruling political parties, which support Mr. Monti for now, are rapidly losing popularity to anti-euro populist forces as national elections approach next spring.

At the same time, some Italians would welcome the idea of the Central Bank's conditions as a way of forcing change through the sclerotic Italian political system. But there is considerable uncertainty about what kinds of conditions would be required in return for the new program, and Mr. Draghi made it clear that there would be different conditions for different countries.

In part to reassure the Germans, Mr. Draghi said that the bank's new willingness to buy bonds of countries facing market speculation would be dependent on "conditionality" -- working out a program of structural and economic change with experts from the European Central Bank, the European Union and the International Monetary Fund, the so-called troika that has arranged full bailout programs for Greece, Ireland and Portugal.

But when asked how conditionality would be defined, Mr. Draghi was deliberately vague.

There is a further uncertainty about the survival of the euro zone, which the Central Bank is mandated to defend. Once the Central Bank loads up further on Spanish and Italian bonds -- it has already bought more than 200 billion euros ($256 billion) of European bonds, including 50 billion euros ($64 billion) from Greece -- it will find it very difficult to stop its bond buying even if countries do not keep to their promises of reform. To do so would be a form of suicide, because it could set off market panic and force countries to exit the euro, beginning a process with no clear end.

But to numerous Europeans in countries with economic problems, from Greece and Italy to Portugal and Spain, there also seems to be no end to hard times.

"I'm pretty convinced that Italy will apply for aid from the E.C.B sooner or later, and we'll work just to repay the money that the Germans lent us," said Gianluca Braia, 40, a Roman who lost his job at a food company that outsourced his work. "I'm happy that Monti is prime minister," he added, "but the music changes little for us citizens."

Reporting was contributed by Landon Thomas Jr. and Stephen Castle from London, Rachel Donadio and Gaia Pianigiani from Rome, Melissa Eddy from Berlin, and Raphael Minder from Madrid.

world

This article originally appeared in The New York Times.


Advertisement
Advertisement
Advertisement

You have 2 remaining free articles this month

Try unlimited digital access

If you are an existing subscriber,
link your account for free access. Start here

You’ve reached the limit of free articles this month.

To continue unlimited reading

If you are an existing subscriber,
link your account for free access. Start here