Today is the day when European Central Bank chief Mario Draghi’s big talk last week about doing ‘whatever it takes’ to save the single currency meets its test. The ECB is meeting to discuss what precisely that entails and will make an announcement at around 1.30 about its decision. After teasing the markets last week, Draghi will need to show some big action to follow those big words, or else investors will panic.
One of the measures that Draghi’s comments last week hinted at is using the ECB and the European Stability Mechanism to buy up government bonds in Spain and Italy to drive down the cost of borrowing away from the danger threshold of 7 per cent. There is one not insignificant problem which is that the German government and the Bundesbank are likely to oppose the idea. The Germans also oppose the idea of a banking licence for the ESM which would give it powers to borrow from the ECB.
The banking licence requires unanimity between the 17 eurozone nations, but bond purchases would only need a majority to go ahead. This will back Angela Merkel into a corner, and the question is whether Draghi includes isolating Germany in his definition of ‘whatever it takes’. As James argued earlier this week, the eurozone can’t continue in this state of crisis for much longer, and Draghi’s statement this afternoon needs to sketch out how the ECB intends to tackle the problems, rather than simply kicking the can down the road.
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