The European Central Bank has been widely criticised for announcing that while it stands ready to buy sovereign bonds, this is conditional upon countries asking for support from eurozone bailout programmes and accepting “strict and effective conditionality”. Bond purchases could buy time. But a bond buying programme that does not require policy changes would contribute nothing to addressing the eurozone crisis and would pose risks, including digging deeper debt, growth and banking holes.
The eurozone’s elected leaders and parliamentarians have been slow to act since the start of the crisis, causing great hardship for millions of Europeans. The issues facing these leaders are complex. But sheltering them from pressure to act only increases the likelihood of continuing failure to do what is needed. And the longer the crises go on, the deeper the holes, the stronger the measures ultimately required, the harder it is to regain confidence and the higher the probability of failure in some form. In the words of a major money manager, “the cost of doing nothing is not nothing”. Of course, as an American commenting on the eurozone, I should acknowledge that this point applies to the US as well, in its failure to address effectively the fiscal, public investment and reform issues critical to our future. (And in full disclosure, Mario Draghi, the ECB president, is a close personal friend.)
The effect of ECB financial support without adequate policy is exemplified by the ECB’s longer-term refinancing operations to eurozone banks, which used the money in part to buy sovereign debt. Many analysts thought that LTROs would buy at least a year, without focusing on how that time would be used. When political leaders continued their inadequate crisis response, markets noticed and crisis conditions recurred more quickly than expected.