European Central Bank President Mario Draghi participates in the European Parliament economic and monetary affairs committee in Brussels May 31, 2012.Yves Herman/Reuters
European Central Bank president Mario Draghi has laid out a compelling case for direct intervention to keep the 17-country monetary union from unravelling and taking the euro down with it. Mr. Draghi told a closed-door session of the European Parliament that a plan devised by the ECB to buy sovereign bonds of the most fiscally distressed euro-zone members is essential to lowering their financing costs to manageable levels and restoring a semblance of stability to markets roiled by a nearly three-year-old debt crisis that has put the euro's survival at grave risk.
Proponents of a more activist role for the ECB have long argued that it must be allowed to behave more like the U.S. Federal Reserve, the Bank of England and other major central banks, whose unrestricted capacity to intervene acts as a credible check on speculators and ensures a measure of order and confidence essential to keeping capital markets functioning properly.
But since its inception, the ECB has had a much narrower mandate: to maintain price stability across the region. Indeed, before Mr. Draghi took over the helm last November, the bank insisted the long-running debt crisis could only be resolved at the political level. For the most part, under strong German influence, bank policy-makers sat on their hands while economies in Southern Europe veered off a cliff and Spanish and Italian bond yields ballooned.
But Mr. Draghi has slowly repositioned the ECB toward a more aggressive role and devised an intriguing argument for doing so. As things stand now, he told the parliamentarians in advance of a crucial bank policy meeting Thursday, plunging market confidence and widening bond yields render the bank's interest-rate weapon useless. "We cannot pursue price stability now with a fragmented euro area because changes in interest rates affect only one country or two countries at most," Mr. Draghi said. "They have no importance whatsoever in the rest of the euro area."
Germany's Bundesbank has opposed bond purchases and looser monetary policy on the grounds that such measures would boost the risks of inflation without solving the deep-seated fiscal and competitive problems at the heart of the crisis.
Mr. Draghi has offered an intriguing counter-argument: Widening yields on sovereign debt undermine the efforts of the central bank to keep interest rates low at a time when several economies have skidded back into recession. It has become impossible for the ECB to ensure price stability.
Most European leaders, including German Chancellor Angela Merkel, have come out strongly in favour of the bond-purchasing strategy, which would be done in concert with the still-to-be-approved permanent bailout fund. As the euro's future grows dimmer, it's imperative that the Draghi plan be implemented as quickly as possible.