For a world so confident that central banks can solve almost all economic ills, the dramas unfolding in Greece and China are sobering.
“Whatever it takes,” Mario Draghi‘s 2012 assertion about what the ECB would do to save the euro, best captures the all-powerful, self-aware central bank activism that’s cosseted world markets since the banking and credit collapse hit eight years ago.
From the United States to Europe and Asia, financial markets have been cowed, then calmed and are now coddled by the limitless power of central banks to print new money to ward off systemic shocks and deflation.
But even if you believe central banks will do whatever it takes – to save the euro, stop the recession, create jobs, boost inflation, prop up the stock market and so on – it doesn’t necessarily mean it will always work.
Draghi himself merely pleaded for faith on that score three years ago when he added, “Believe me, it will be enough.”
Critically, given the direction of events in Athens, his celebrated epigraph was preceded by “Within our mandate…”
And so the prospect of the European Central Bank potentially presiding over, some say precipitating, the first national exit from a supposedly unbreakable currency union will inspire a rethink of the limits of Draghi’s phrase for all central banks.
Of course, the ECB does not want to push Greece out of the euro. But ‘whatever it takes’ may just not be enough to preserve the integrity of the 19-nation bloc if the ECB’s mandate prevents it from endlessly funneling emergency funding to insolvent Greek banks.
And as long as the Greek government is at loggerheads with its creditors, the central bank can’t wave a magic wand of monetary support without breaking its own rules.
The ECB continues to insist it will do all in its power to prevent contagion to other euro zone markets and there’s little doubt it will make good on that. But the problems stemming from a Greek exit are not of financial seepage but of political contagion to other euro electorates tiring of austerity. And that sort of contagion is beyond ECB control.
via Greece and China expose limits of ‘whatever it takes’ | Reuters.
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