Financial Times
September 6, 2012
This year, the critical question in Europe has changed from whether policymakers could find the required policy instincts – they have – to whether they are moving fast enough to get ahead of the deleveraging by the private sector.
By announcing a new conditional bond purchase program on Thursday, the European Central Bank took a major step to close what, at one time, seemed a near-insurmountable deficit in this race. It now needs the support of other policymaking bodies to fully eliminate the gap.
European policymakers and politicians were very slow in 2009-10. Insufficient understanding of regional debt dynamics, together with widespread denial that Europe could be on the receiving end of a typical “emerging market crisis,” made it even harder to coordinate policy in a monetary union with very different initial conditions among its 17 member countries. The longer this persisted, the more policies fell behind the exiting of private capital.
As the regional crisis deepened in 2011, governments and the ECB adopted a policy approach more commensurate with the complexity of the crisis. Namely, seeking to break the link between sovereign credit deterioration and banking sector weakness, trying to change the policy mix for struggling countries and, at the regional level, addressing design flaws in the original monetary union through banking and fiscal unions and closer political integration.
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