Financial Times
October 25, 2011
Dear Mario,
Congratulations and commiserations: next week, you will take up one of the most important central banking jobs in the world; but you will also bear a frightful responsibility. The European Central Bank alone has the power to quell the eurozone crisis. You must choose between two paths: the orthodox one leads towards failure; the unorthodox one should lead towards success.
The eurozone confronts a set of complex longer-term challenges. But the members will not get the chance to make needed adjustments and implement required reforms if it does not survive. The immediate requirements include putting Greece on a sustainable path; avoiding a meltdown in public debt markets of several large countries; and preventing a collapse of banks. Of these, it is the last two that matter.
The economist who has best explained the role of the ECB is Paul De Grauwe of Leuven university. Why, he has asked, do rates of interest on the debt of several big eurozone member countries exceed the UK’s, even though the latter’s fiscal position is far from superior: Spain’s deficits and net public debt are lower than the UK’s; Italy’s debt ratio is higher but its deficit far smaller; and the French deficit is smaller, though its debt is slightly larger.
It is surely surprising that markets view UK debt less sceptically than those of the others. It is not because Anglophones have devised a cunning plot to destroy the euro; they are not that clever. To put Prof De Grauwe’s alternative explanation starkly, it is the central bank, stupid.
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