ANALYSIS: THE COMING days will be crucial. EU leaders gather next Thursday night in Brussels for their eighth and final summit of the year. As a hurricane whips through the euro zone, they are under pressure as never before to come up with a definitive solution to the debacle.
In question is the role of the European Central Bank. Prohibited from lending directly to distressed countries and wary of creating a slush fund for errant governments, the bank is resisting a clamour to intensify its campaign to prop up the single currency. Whether it can continue doing so without the euro imploding seems doubtful.
Not that the ECB has accepted the point. True, co-ordinated action with the world’s biggest central banks points to heightened concern about the strains in the financial system. But that is not the same as the ECB becoming a lender of last resort to embattled sovereign nations.
This is dangerous territory for ECB chief Mario Draghi, who took up the job only one month ago, and for German chancellor Angela Merkel, who remains dogmatically attached to the notion that it is bad practice for central banks to print money for governments. The problem they and other EU leaders face, however, is that this question of principle could yet topple the single currency as we know it.
All the while, EU leaders are working on various proposals to reinforce the writ of European budget rules. The most significant of these – from Merkel and French president Nicolas Sarkozy – will embrace changes to the European treaties. Sarkozy sets out his view in a speech today, and Merkel follows suit tomorrow.
Their proposals are unlikely to go down well with Taoiseach Enda Kenny, who is wary of a European referendum. But he may not have any choice.
The bigger question, however, is whether any summit deal to proceed with a more rigorous form of economic governance is sufficient to appease the ECB. At this point, many participants in the rescue effort believe only it can restore calm.
The eurobond proposal, they point out, is a salve for the longer term and is unlikely to settle the storm on its own. After all, the crisis is more potent than ever. Disaster looms if Italy cannot refinance itself at reasonable cost. And the rates it must pay – ahead of massive bond redemptions in the new year – are rising.
Although two days of talks between finance ministers served to smooth out some uncertainty over the operation of the European Financial Stability Facility bailout fund, the rescue effort is moving to a higher level. Europe has turned anew to the International Monetary Fund because the effort to “leverage” the EFSF fell well short of the €1 trillion target.
With governments throughout the euro zone short of cash, the pertinent question here is whether the ECB joins the effort by providing loans to national central banks to lend on to the IMF, which it would then lend to distressed governments.
This might seem like another variant of the monetary financing the ECB so dreads, but there is a subtle distinction. While EU law forbids the ECB from directly financing governments, there is no bar on lending to the IMF.
As this question came under scrutiny, attention was drawn to an “opinion” the ECB issued in October 2010 at the behest of the Austrian National Bank.
“The financing by national central banks of obligations falling upon the public sector vis-a-vis the IMF is not regarded as a credit facility within the meaning of the treaty,” the opinion said. It said the ECB “came to the same conclusion” over laws authorising the Slovenian and Austrian central banks to provide payments to the IMF on the basis of bilateral agreements with the IMF.
Still, the determination that a particular action might fall within the letter of the law is not the same as deciding to do it. The ECB’s stance remains difficult to divine. In the hours before the EU summit begins next Thursday, the bank’s governing council meets in Frankfurt. The week ahead will be very interesting.
