Almost exactly one year ago I wrote a blog post entitled ECB success shows extent of failure. The ECB had just announced its intention to buy Spanish and Italian bonds. Interest rates on the bonds had fallen significantly. The markets were happy. As I pointed out, this was more an indication of policy failure than success. The ECB – and European policymakers more generally – did have the means to arrest the crisis. They were just politically not willing to use those means effectively, and that essentially meant to a sufficient extent and, above all, in a way that makes it clear to ‘the markets’ that it will maintain policy for as long as it takes to finally turn things around and shift from ‘bad’ to ‘good’ equilbria.
One year on, and the same sorry tale is repeated. Markets are happy, yields are down, the euro is up. Why? Because Mario Draghi, visiting London for the opening of the Olympic games (I kid you not), said “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
I could save myself the trouble and simple re-issue the year-old post.
Once again, apparent success is in fact an admission of failure. The crisis has been unnecessarily prolonged and deepened at great human cost. And unless decisive and consistent action follows these ‘cheap’ words, it seems likely that I will be able to recycle my blog post once more in a year’s time. If the euro is still around, of course. Until I see the ‘bazooka’ firing one or more rounds every day until yields are lastingly at sustainable levels I see no reason for optimism that there has been a true change of heart. Please let me be wrong.
The European crisis is a willful and culpable failure of policy. History will not absolve them.