Mario Draghi, the recently installed head of the European Central Bank, is in no mood for monetary salvation. Instead, it’s price stability all the way—inflation fighting, in other words. “Gaining credibility is a long and laborious process,” he says. “But losing credibility can happen quickly — and history shows that regaining it has huge economic and social costs.”
The credibility to which he refers is the ECB’s inflation-fighting credentials. But there are other types of credibility, and some are more pressing than others at certain junctures in history. To wit, the financial crisis that threatens to turn the eurozone into a macro morass. That, says Draghi, is a fiscal issue and one that only politicians can address. The notion of the ECB embracing its inner lender-of-last-resort muse is off the table, at least for now. As for Europe’s suffering that has nothing to do with inflation, let them eat cake, is the ECB’s effective response.
Perhaps someone should explain to Mr. Draghi that the quixotic pursuit of inflation credibility won’t mean much if the euro goes the way of the dodo. The currency—the entire edifice of the eurozone—is fighting for its life. Survival is a tricky affair in the wake of debt-deflation blowback. There are no easy solutions, but it’s easy to make it worse, and the newly installed ECB chief seems to be moving down that path, and thumbing his nose at the lessons of economic history in the process.
Let’s be clear: the rising yields in Europe outside of Germany are slowly strangling the European economy, and the odds for the euro’s survival. A new recession appears to be a given on the Continent, and without a central bank-led effort to lower those yields by purchasing bonds the pain is set to get worse, perhaps much worse.
The last stand in this battle may be French government bond yields. Surging spreads over German bonds has already victimized Greece, Ireland, Spain, Italy and Portugal and now the disease seems to be attacking France. Earlier today, French yields rose to just over 3.5% and more of the same may be coming. It’s not clear what happens next if France tips over to the dark side, but does Mr. Draghi really want to find out?
Maintaining a credible inflation target has its place—and time, but none of that applies to Europe now. A long, clear history of central banking during financial and economic crises tells us so. And there’s no guarantee that Germany won’t be afflicted in time either.
The great irony (and tragedy) is that Draghi’s plans for saving the euro threaten to undermine it and perhaps destroy it. Mario knows this, but paralysis reigns supreme. There will be a heavy price to pay if it rolls on.