Ben Chu: Only the ECB can calm crisis, but it is still dragging its feet

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The Independent Online

Super Mario to the rescue? Not on the basis of yesterday's performance. Many investors had assumed there was an unspoken deal between the key decision-makers in Frankfurt, Brussels, Berlin and Paris. National governments would embrace the strict new balanced budget rules demanded by Germany this week and, in return, the European Central Bank's new president, Mario Draghi, would commit to buying up as many eurozone sovereign bonds as necessary to stabilise the single currency.

The fiscal discipline part of the deal was always a nonsense. This crisis is not a consequence of overspending by governments. Every distressed European nation, with the exception of Greece, had fiscally conservative governments in the years prior to the 2008 bust. Several ran budget surpluses. What has destroyed the public finances of nations such as Spain and Ireland is the bursting of huge property bubbles that were inflated by profligate domestic banks (which were funded, in turn, by banks across Europe).

It was the private sectors, not the public sectors, of these nations that ran amok. Angela Merkel's new restrictions on state borrowing would not have prevented the present conflagration. Nor will they prevent a similar disaster happening in future.

The markets know this. Yet they have been happy to indulge the German pantomime so long as it meant the ECB could start doing its proper job. The problem, though, is that Mr Draghi yesterday sounded like he had never heard of the secret rescue deal. Not only did the ECB president rule out any large-scale purchases of eurozone sovereign bonds, he also scotched hopes that the ECB was preparing to lend to the International Monetary Fund so the Washington institution could do the stabilisation job instead.

He said not only must the letter of the EU treaty clause that prevents the financing of eurozone government debt by the central bank be honoured but "the spirit" too. In other words: no back-door ECB-funded bailouts. Mr Draghi sounded like a man who would rather allow the eurozone to break up than contemplate a breach of the ECB's deficit-financing rule.

Is there any hope? Mr Draghi left the door open, ever so slightly, to national central banks, rather than the ECB, priming the IMF to rescue tottering European states. But, even if such a cumbersome scheme materialised, there has to be doubt over whether it would succeed in calming rattled investors.

The ECB is the only credible stabilising institution around. European politicians and policymakers, primarily German ones, have wasted 18 months trying to find alternatives to deploying the firepower of eurozone's central bank to rescue the single currency. It now looks as if they have resolved to waste even more time.