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Will the two Marios – Mario Monti, the new technocratic prime minister of Italy, and Mario Draghi, the still quite new president of the European Central Bank – save the eurozone? No. But individuals can make a difference. These men bring sophisticated pragmatism to the table. Without that, this flawed structure will not survive. Policymakers must be both more cooperative and more flexible. The economic and political costs of a breakdown would be so large that one has to hope for better. Maybe the two Marios will shift policy in a more productive direction.
Two straws float in the wind.
The first is the new long-term refinancing operation, announced by the ECB last month. With banks under fierce funding pressures, the offer of three-year money at the average of the ECB’s benchmark rate (today 1 per cent), without stigma, was one the eurozone’s banks could not refuse. Initial take-up was €489bn for 523 banks. The balance sheet of the ECB is about to explode. This was a bold and cunning move by Mr Draghi and probably the most he could get away with right now.
Cheap longer-term central-bank funding should help stabilise the eurozone financial system. Whether it will also stabilise sovereign debt markets is far less clear. Most European banks are likely to resist purchasing the debt of riskier sovereigns, given the pressure from the European Banking Authority to raise the capital they hold. But the domestic banks might make different decisions, probably under pressure. That would help fund vulnerable governments, but also increase the concentration of risk in domestic banks.
A second straw is the willingness of Mario Monti to argue, in an interview with the Financial Times, for creditor countries to do more to lower his country’s borrowing costs, even warning there would be a “powerful backlash” among voters in the periphery if they did not. Mr Monti is in a strong position to make this argument. If not him, who? If not now, when? He is a well-respected official with staunchly pro-European views and a strong sympathy for German attitudes to competition and fiscal and monetary stability. Upon his success is likely to depend the survival of the euro, at least in its current form. His failure would surely bring the deluge.
Messrs Draghi and Monti are addressing two interlinked fragilities: the vulnerability of the banking system and the unsustainable terms on which weaker countries can now borrow. But they cannot resolve these difficulties. For that more radicalism is required than either can deliver, on his own.
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