Speaking at a press conference this afternoon, European Central Bank president Mario Draghi said that the bank remains “on a continuous search for actions that could attenuate the current crisis.”
This reflects the fact that, last month, the ECB both cut its benchmark interest rate to 0.75%, while reducing its deposit rate (i.e. the interest banks get to keep money with the central bank overnight) to 0.0%.
The first move will make borrowing cheaper for European businesses, and the second encourages banks to lend to each other (since there’s no longer a financial incentive to keep funds at the ECB.)
Yet, it must be admitted that neither of these things does anything to immediately solve Europe’s problems. Instead, they’re about adhering to the central bank’s “price stability mandate,” whereby inflation is kept at 2.0%.
That’s without a doubt useful, but will the ECB do more to end the debt crisis?
Although the ECB has what’s been described as “unlimited firepower,” in that it could theoretically print as many euros as it likes to keep the currency bloc afloat (much like the Fed in the States) it’s unlikely to do so.
This is because, unlike in the States, different parts of the Eurozone have differing opinions about how it spends its money. The German Central Bank, in particular, is cautious of the ECB making free with the printing presses, given that this essentially amounts to spending German money, while stoking inflation.
Not our job?
In addition, there is the fact that Draghi doesn’t see it as his job to rescue the bloc. Speaking on June 6th 2012, the ECB president told a press conference that: “It is not right for monetary policy to fill other institutions’ lack of action.”
In other words, the European Central Bank shouldn’t in itself try to compensate for the shortcomings of Europe’s political leaders. The present crisis reflects their indecision, and the central bank cannot (and should not) make up for that.
On the right track?
Last but not least, it’s possible Draghi believes the Eurozone to already be on the right track, no matte how slow it’s moving. Speaking at his most recent press conference, he said: “It is quite clear that we have social tensions. But what’s the alternative?”
In other words, yes, the austerity imposed in Portugal and Spain is causing unrest, but what should we be doing otherwise? This suggests he won’t do more to aid the Eurozone, because the necessary adjustments (though difficult) are already happening.
In short, don’t look for Mario Draghi to come to Europe’s rescue.