Today’s ECB’s press briefing was a masterful display in the difficult art of communication. Staying strictly within the bounds of the ECB’s mandate of ensuring “price stability” through the appropriate transmission of a “single monetary policy”, President Draghi responded fully to his side of the bargain by putting the full weight of the ECB behind a detailed set of new measures needed to restore market confidence in the ailing Economic and Monetary Union. Despite the dissent of the (unnamed) German Governor, no reasonable observer could have expected the Governing Board to have gone any further without transgressing rules and risking losing its cherished independence, which underpins its well earned credibility.
What had already been outlined in very general terms, early last August, was confirmed: the mobilisation of resources under the new “Outright Monetary Transaction (OMT) facility is subject to prior “strict conditionality” to be agreed by the European Authorities within the framework of the existing intervention mechanisms (EFSF/EMS) and, if possible, with the full cooperation of the IMF. The onus is therefore clearly in the hands of Governments, firstly those who apply for assistance and secondly those who authorise it.
As President Draghi subtly emphasised, there are two legs to the proposal and both are needed and dependant on each other for success. The whole question boils down to: will there be a political consensus to provide the conditions which are needed for the ECB to act?
The immediate positive market reaction seems to convey the following message: the ECB has delivered its part of the bargain (including concessions on its preferred creditor status and further flexibility in ensuring availability of sufficient collateral for its regular refinancing of the banking system). If Governments live up to their side, the package may prove to be a very positive first step in dealing with the crisis.
Markets will now focus all their attention on reactions from the 17 EMU Member States as no ECB action can be forthcoming until the EMS is up and running (subject to the German Constitutional Court decision) and that countries wishing assistance apply for support and negotiate a comprehensive adjustment program to be monitored by the EU authorities.
It is symptomatic that, when he was asked whether the position of the ECB contained a “political” message to Governments in favour of a federal Europe, President Draghi retreated carefully behind the irreproachable strict adherence to the ECB’s “monetary policy mandate”. There should however be no doubt that the show of solidarity, as well as the structural and institutional reforms, demanded from EMU Members by the ECB, are only compatible with further EMU/EU integration and flies in the face of the nationalist/populist rhetoric of the euro sceptic camp. The outcome of the forthcoming negotiations may therefore well become the key to the survival of EMU and of the EU itself.
Any sign of wavering will be severely and rapidly sanctioned by markets. The stakes have never been higher and the short window of opportunity, opened by the clear and forceful position of the ECB, may not present itself again.
Brussels, 6th September 2012
Paul N. Goldschmidt
Director, European Commission (ret.); Member of the Advisory Board of the Thomas More Institute.
Tel: +32 (02) 6475310 +33 (04) 94732015 Mob: +32 (0497) 549259