December 1, 2011
France wants the European Central Bank to buy bonds. Germany wants greater fiscal discipline to be anchored in euro-zone treaties. ECB chief Mario Draghi hinted on Thursday that both might get their way. But treaty changes must come first.
The boost from Wednesday's coordinated action taken by major central banks around the world was immediate, but short lived. Whereas global stock indexes shot up after the announcement that the European Central Bank (ECB), the US Federal Reserve, the Bank of England and others would make it easier for banks to access US dollars, the euphoria quickly faded on Thursday.
Indeed, even ECB chief Mario Draghi felt compelled to warn against misplaced optimism. In a speech to the European Parliament on Thursday morning, he said that "downside risks to the economic outlook have increased." In other words, the euro crisis, which has recently morphed into a financial crisis, could soon become an economic crisis.
But Draghi also seemed to hint at a possible way out of the downward spiral, saying that the ECB could be prepared to take additional steps to halt the crisis. First, however, Europe needed to move quickly toward greater economic integration.
"Other elements might follow," he said, in reference to the coordinated central banks' action taken on Wednesday. "But the sequencing matters." He added that "a new fiscal compact would be the most important signal from euro-area governments for embarking on a path of comprehensive deepening of economic integration."
Draghi did not outline what kind of action the ECB might take, but he said that one reason the ECB had not embarked on the kind of massive bond-buying spree that many have called for is the concern that it would remove pressure on heavily indebted euro-zone nations to implement strict austerity programs.
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