An optimist could hope that the ECB action will prove to be an important factor that in a couple of years will see progress on the sovereign debt problems and even return to decent economic growth.
Despite what any reasonable person would judge to be the strict conditionality of the OMT, there were some who were highly critical of the scheme, with the main criticisms from German officials and politicians. In a sign of professional petulance, the Bundesbank went so far as to issue a statement after Mr Draghi’s press conference which said the proposal was “tantamount to financing governments by printing banknotes”.
During his press conference, Mr Draghi acknowledged that there was one dissenter at the ECB’s governing council meeting, although he refused to say who it was. But given recent public comments on the matter and the Bundesbank statement, it was undoubtedly the Bundesbank’s president Jens Weidmann.
German Finance Minister Wolfgang Schaeuble has also kept up his attack on the ECB suggesting the “monetary policy can’t solve fiscal problems” and “false incentives” must be avoided in the euro crisis. Rounding out his venting, Schaeuble suggested that the European Union would become “irrelevant” if it couldn’t unite.
While the Germans were clearly not happy with the proposal, financial markets were. Even though the details of the ECB plan were pretty much fully leaked yesterday, that did not stop a powerful reaction in financial markets. Share prices jumped sharply with the major European markets rising 2-3%. In Spain and Italy, shares were up close to 5% for the day.
The optimism spread to the US where stocks prices rose by around 2% to reach multi-year highs. The euro rose to around $US1.2650 and the optimism even spread to the Australian dollar which is back near $US1.0300, despite a run of softer local economic news. Bond yields in the Spain and Italy continued their stellar rally as investors got in ahead of the ECB intervention.
The OMT is a long-run plan to hold the eurozone together and to repair the damage from unsustainable fiscal settings. Its success will be best judged in the years ahead, not in the next few months. But if it can facilitate a move to balanced budgets and at the same time put a floor under the recession and at some time next year see the eurozone return to growth, it is a policy worth pursuing.
This article first appeared on Business Spectator.
