There were three different options available to the European Central Bank at yesterday's monthly meeting. It could cut interest rates; it could make another slug of cheap loans available to the eurozone's struggling banks; or it could re-start its bond-buying programme to ease the strain on the bloc's distressed governments. In the event, Mario Draghi chose to ignore both the latest figures pointing resolutely towards recession and the crisis threatening to bankrupt Spain, and do nothing at all.
There are strong arguments in favour of concerted action from the ECB. With the very existence of the single currency at stake, the euro's problems need all that can possibly be thrown at them. But, as the central bank president noted last week, monetary policy alone is not enough. The ECB cannot "fill the vacuum" of inaction by governments. And what a vacuum there is.
Spain's banks need a capital injection of an estimated €40bn, money that Madrid can neither find itself nor afford to borrow. The Spanish government wants a change in the rules so that the European bailout fund can recapitalise banks directly, avoiding the political humiliation of a sovereign bailout. Germany, however, is unwilling to allow euro-area taxpayers' money to be disbursed without the conditions that a fully fledged government rescue would entail. Until an agreement can be reached, the black hole in the Spanish banking system will only widen, with all the fearsome implications for Spain, for Italy, for the euro, and beyond. Yet days go by with startlingly little progress.
In so inauspicious a climate, Mr Draghi's reluctance to squander the ECB's monetary firepower – which might, unaided, buy Spain a few weeks at best – is understandable. Over the course of Europe's slow-burning crisis, it has been too easy to point the finger at politicians, as if there were a simple solution to be had if only they would take it. There is, alas, no one right answer and no course of action that does not come with massive costs for all concerned. In this latest three-way face-off, however, the immediate solution is, for once, relatively straightforward. But someone must blink first. And that someone must be Spain.
Thus far, Madrid's handling of the situation has been anything but helpful, marked by exactly the confusion and disingenuousness to which investors are most averse. Even now, the incoherence continues, with one minister warning, on Tuesday night, that Spain's "door to the markets" is not open, only for another to declare that there were no plans for a bailout on the following morning. The claim that the government will judge its next move on the basis of an audit establishing the extent of banks' losses – which may take until the end of the month – is no more credible. With the €2bn bond auction scheduled for today already in question, a comprehensive figure on how much is needed may be useful, but it is hardly material. Neither would there be the time to wait for it, even if it was.
Painful or not, prime minister Mariano Rajoy must make a formal bailout request as soon as possible. Delay will only add to the difficulties, both in Spain and across the eurozone. Only with movement from Madrid will the German Chancellor have space for compromises of her own, as regards either the conditions attached or longer-term proposals such as the pooling of excess debt. And only then might the ECB president sanction further monetary action.
Europe has two, overlapping problems: a sovereign debt crisis and a banking crisis. Although both must be solved, the banks must be dealt with first. The European Commission President is right about the need for a unified banking system, with euro-wide regulation and deposit insurance. But such measures take time. Spain needs help now. A full bailout, including both Europe and the IMF, is the only answer.
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