Folha de São Paulo (Brazil), December 7, 2011
The house is on fire and the owners are arguing about what kind of safety regulations should be implemented in the future so as to prevent these types of fires. That is what appears to be going on in the eurozone right now, as European leaders try to reach agreement on a series of measures that would impose “fiscal discipline” on member states in the future.
Of course, these would-be fire marshals haven’t even identified the correct safety regulations, since it was not over-borrowing by governments that caused this crisis, but rather over-borrowing, bubble-driven growth, and other excesses of the private sector. But the most urgent problem right now is the fire itself – the eurozone is already in recession, according to the OECD, and their financial crisis is already slowing the world economy. This includes Brazil, which today announced that GDP growth for the third quarter has been zero.
However, we have entered a new phase of the crisis — although it has been barely noticed by the media — which is mainly focused on the proposed fire safety regulations. On Friday, the head of the European Central Bank (ECB), Mario Draghi, hinted for the first time that the ECB could play a bigger role in buying Italian and Spanish bonds. According to press reports, he justified this on the grounds that the ECB had a responsibility to maintain price stability “in either direction.”
This is a 180-degree turn-around from the ECB’s prior insistence that such action would violate the treaty that established the Bank’s mandate. In other words, he was saying that the ECB could intervene more with the rationale that it is preventing deflation, which is a possibility (though still remote) if Europe slides further into recession. Of course this is just a not-very-credible excuse, but a very welcome one for Europe and the world, since Italian and Spanish bonds are at the heart of the current crisis. If the ECB were to commit to keeping these interest rates at low levels by buying these bonds, financial markets would stabilize and the eurozone could potentially recover.
But there is a catch: the ECB will only do its job and end the crisis if it gets the austerity it wants from European governments. Now we can see in clear daylight what is really going on: the ECB – backed by Germany and some other governments — can end the crisis at any time, at no cost to European taxpayers. But it is prolonging the crisis in order force “reforms” — such as raising the retirement age, cutting spending, privatizations, even EU control over national budgets – that most Europeans would never vote for.
That is why the eurozone crisis is far from over: not because of the difficulties of governance with 17 countries. It’s because the ECB and its allies don’t really want to resolve the crisis as much as they want these unpopular “reforms.” At best, the European authorities will do enough to avoid a financial meltdown, but risks will most likely return as they push Europe further into recession with unnecessary and harmful fiscal tightening.