THE LATEST ATTEMPT TO SAVE THE EURO / THE NEW YORK TIMES EDITORIAL

Editorial

September 6, 2012

The Latest Attempt to Save the Euro

 

 

It took a while, but on Thursday Mario Draghi, the president of the European Central Bank, explained what he meant last July when he said he would do whatever it takes to save the euro.

 

 

      

Largely as expected, Mr. Draghi said that the E.C.B. plans to buy government bonds issued by troubled euro zone nations, a strategy to hold down borrowing costs in countries like Spain and Italy and, in the process, buy them time to rebuild their recession-racked economies.

 

 

 

      

What wasn’t fully anticipated was the bleak economic backdrop of the announcement. The E.C.B. revised its projections downward to show a contraction in the euro zone this year of 0.2 percent to 0.6 percent. The Organization for Economic Cooperation and Development also downgraded its assessment, saying that the euro zone recession would worsen in the second half of 2012 while growth in other developed nations, including the United States, would continue to be slow.

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Financial markets mostly ignored the pessimistic forecasts, instead rallying on the E.C.B.’s pledge of a new rescue effort. But the broader economic picture underscores the urgency — and limitations — of the latest move.

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The new program is an improvement over previous central bank interventions. Notably, there will be no preset limit on the bond purchases, reducing worries that the help will not be sustained enough to make a difference. Nor will the E.C.B. insist that it be first in line to be repaid, allaying fears that private creditors would be disadvantaged by its new bond purchases.

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And while the governments in trouble will have to ask for aid and, in exchange, agree to undertake economic and fiscal reforms, there is reason to hope that such reforms will not be as backbreaking — and counterproductive — as those imposed on Greece and other bailed-out nations. The European Central Bank put forth the new plan over the objection of the German central bank, a big champion of austerity. That could indicate that the bond purchases will not be coupled with the same kind of severe austerity that has characterized rescue efforts so far.

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Despite these positive signs, the plan could still be derailed. It is structured to work in tandem with the new permanent European Union bailout fund, which has been held up until at least Wednesday, when a German court will rule on the constitutionality of Germany’s participation. Given Germany’s economic and political importance, a legal setback would send European officials back to the drawing board in search of solutions.

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Even if the E.C.B. plan moves ahead, it cannot by itself cure what ails the euro zone. Deficit hawks have focused on the danger that a rescue by the central bank would remove the incentive for troubled nations to undertake necessary fiscal reforms. A bigger danger is that all of the euro zone’s political leaders could be lulled by a successful intervention into letting up on efforts to unify the currency union for the long term, including the creation of Pan-European banking, fiscal and political unions. 


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The E.C.B. has taken an important step to save the euro. For the euro’s survival, and for the health of the global economy, Europe’s leaders now have to follow up.