Can the Euro be saved by the ECB?

Mario Draghi pulled rabbits out of hat this week, creating a global stock market boom by promising to do ‘whatever it takes’ to save the Euro.

But is that credible?  In the monetary economy, of debts accounts, it certainly is.  The ECB could print a few trillion Euros, buy up all the sovereign debt of the weak Euro countries and their banks, and then burn it — everyone gets to start over; hooray!!

Germany still is not too keen on the idea of printing money to pay off state debts; they fear inflationary pressures.  In fact, the risks of inflation are low even with radical measures — the ECB’s LRTO last year injected a trillion Euros of credit into the banking system and had absolutely NO impact on inflation.

But in the real economy, of things and buying and selling, it is not so clear what the ECB can do.  In the real economy, Greece’s government is corrupt, underfinanced, and its economy uncompetitive;  Italy’s is similar if not as bad, Portugal likewise; and Spain and Ireland have huge housing busts with miles of unsold housing tracts wasting away.  If all are compelled to stay in the Euro, their governments will not be able to pay their way out of tax revenues, their economies will not grow, and they will find themselves in the same fix as today. People will not have jobs, and the social compact between state and people that has defined western Europe will be impossible to maintain.

That is why the Euro crisis is so severe — it is not just a debt crisis, but also a crisis of adjustment of economies moving in different directions but tied to a single currency.  That is a problem no central bank can fix on its own.

I expect the joy of this announcement will wear off, like so many in the past three years, and then European leaders will again face the real problem of adjusting their economies, which means either greater union or break-up.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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