THE TELEGRAPH – BLOGS: The commitment by European leaders to do “whatever it takes” to defend the single currency is a repeat of what US policymakers were forced into in the wake of the Lehman Brothers collapse. Not until the US Treasury and Federal Reserve promised in effect to bailout every bank and financial institution that looked like sinking did the hurricane begin to abate. Europe will be hoping for similarly positive results from yesterday’s smorgasborg of initiatives. The initial response of markets is encouraging. But this is not yet an entirely done deal, despite President Sarkozy’s bombast. There’s many a slip.
Whether it works in the longer term is anyone’s guess. Euro nations have in effect taken another giant step down the road to fiscal and political union by agreeing to cross guarantee the loans of weaker nations. No less significant, the European Central Bank has been dragged kicking and screaming into conducting a programme of quantitative easing – buying up public and private debt securities – similar to that already carried out in Britain and the US.
In its announcement, the ECB has attempted to pass this off as little more than a technicality to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. But although the ECB plans to carry out operations to remove the extra liquidity its actions inject into markets (sterilization), making them neutral for monetary policy, it is plainly much more than that. Again, its actions are indicative of more overt economic union than we have seen to date.
By the way, the ECB has a lot to answer for in provoking the final stages of this particular meltdown. Last week’s press conference by the ECB president, Jean-Claude Trichet, was a textbook study in how not to do it. When he said that the idea of buying up government bonds had not even been discussed by the ECB’s governing council, he seemed like a man in denial, with very little grasp of the seriousness of the crisis he was sailing into. It wasn’t really his fault. Lack of transparancy has been a persisent problem for the ECB. Trichet’s inability to confess outright to a strategy that must by then have been under consideration caused confidence to plummet. Belately, the ECB has been able to do the right thing, though there is still a worrying lack of detail over what the plan entails. Read on and comment >>> Jeremy Warner | Monday, May 10, 2010
