Recent announcements by the European Central Bank have suggested a renewed round of activism for the Frankfurt-based institution. On The Current Moment, we have commented on how the Euro has become a material constraint for a regional economy still marked above all by national variations and diversity. Previously, during the 1990s, national governments across Europe invoked the constraints of the Maastricht convergence criteria as reasons to cut spending and to elevate macro-economic policymaking to a quasi-constitutional status and thus untouchable by the masses. At that time, the Euro was more a political strategy than it was a real material constraint. Today, this has changed. Ideas become entrenched in institutions over time and are subsequently more difficult to challenge or to transform.
Looking at Draghi’s recent decisions, and seeing how promptly France has entered into the austerity camp, we can also see that the Euro serves as a sanction for the lack of political experimentation in Europe today. The claim that “there is no alternative to the Euro”, made by Draghi, Merkel and others, is shorthand for saying that there is no alternative to the approach adopted so far in response to the Eurozone crisis: backhanded financial transfers to Europe’s ailing financial sector combined with much more public austerity measures designed to reassure markets about the long-term viability of European economies.
Draghi’s speech last week – taken by some as leap into new terrain for the ECB – was a reiteration of this same approach. Though the ECB’s announcement appeared to transform the ECB into a lender of last resort, it was in fact just one big bet on austerity. The novelty of Draghi’s announcement was that bond purchases – hitherto tightly limited to precise and timely interventions – would be unlimited. The head of the ECB also promised that the ECB would rank itself as equal to other creditors, meaning that its bond buying would not result in private creditors finding themselves unceremoniously pushed behind the ECB in the pay-back queue. Taken at face value, Draghi seemed to be doing what many have argued should have been done a long time ago: transform the ECB into an institution with the powers to print money in the event of real crisis.
Looking at the decision more closely, we see that Draghi was more cautious (see here for a useful discussion of how previous bond-buying efforts by the ECB have failed to have their intended effect). What he was in fact proposing was unlimited bond purchases on the condition that needy economies commit themselves to the conditionality set by the EU creditors. His promise also rests on the very big assumption that the austerity measures being introduced across Europe will in the medium term lead to a return to growth. Because if not, then there is no amount of ECB backing that will do the trick. On conditionality, there are reasons why some governments may balk at accepting the terms coming from Brussels. Cooked up by national and European officials, these conditions are likely to be far-reaching and Spain’s leader, Mariano Rajoy, has quite a bit to loose by accepting them. On the effect of austerity, the assumption seems to be that if governments make the tough cuts necessary to get back to budgetary balance, they will also return to positive growth. Looking around Europe, this is difficult to believe.
Draghi’s move is firmly within the European consensus about the need for bailouts to the financial sector combined with drastic cuts in government spending everywhere else. This approach, unsuccessful so far, sits as the only idea pursued by policymakers of all political stripes. The Euro appears as both a material constraint upon an uneven and diverse regional European economy and an obstacle to any kind of political experimentation in macro-economic governance.