“We say that the euro is irreversible. So unfounded fears of reversibility are just what they are – unfounded fears”. The words yesterday of Mario Draghi, president of the European Central Bank (ECB) as he unveiled plans to buy up bonds from Eurozone countries in order to get borrowing costs – the single biggest problem facing countries on that zone’s southern periphery – to fall.
In taking this action, Draghi has effectively done something that this blog has said for many months now is inevitable and unavoidable for the Eurozone: he has made the ECB the lender of last resort. Any significant currency must have such a body standing behind it, as the Bank Of England does with Sterling and the Federal Reserve does with the US Dollar.
Indeed, it was the experience of the USA following the Civil War, with bank runs and financial crises occurring with ever greater force, that made the setting up of the Fed an inevitability. And, although the Fed couldn’t stop The Great Crash and its aftermath, it has done pretty well since. And Sterling has survived all manner of crises over the centuries by having the Bank Of England behind it.
But, and with the ever evolving history of the EU and Eurozone there has to be a but, the actions outlined by Draghi yesterday do not in themselves conclude matters. As this blog has also pointed out many times, there are two other strands to ensuring the stability and continuity of the single currency, one of which is the acceptance that there will have to be further restructuring.
That means Spain – including some of its autonomous regions, notably Catalonia and Valencia – as well as Italy having to seek assistance. But the process will have been made easier if borrowing costs are lower. You can’t all have the same currency and then have countries like Germany borrowing at a rate several points lower than that demanded of Spain and Portugal.
And the third strand is that there needs to be more of a Eurozone wide regional policy. The UK Government has for decades given tax breaks to less well off areas and otherwise encouraged businesses to set up there – as well as sending parts of that Government out of London to those regions. Yes, there is some effort in this direction at present. But it’s not nearly enough.
For starters, there is little use expecting Greece to recover with any speed if the country does not have the means to generate the necessary economic activity, for instance through exports. It needs more than tourism and shipping. Spain, Italy and Portugal have significant engineering and technical capacity to generate that activity. Time will tell if the EU is prepared to take the necessary action.
But Draghi made a very welcome first step yesterday. Let’s have more, and soon.