President of the European Central Bank Mario Draghi is giving a speech tomorrow on the euro crisis and what steps the ECB will be taking in the coming months. This month will be decisive for the future of the eurozone; the German Federal Constitutional Court is scheduled to rule on the constitutionality of the European Stability Mechanism, the troika (European Central Bank, International Monetary Fund, and European Commission) is set to rule on the Greek attempts at implementing austerity reforms, and the Dutch will hold an election. Although Draghi has previously spoken optimistically on the ECB’s ability to solve the euro crisis, some are unsurprisingly more skeptical.
Bloomberg reported that the ECB will almost certainly approve potentially unlimited sterilized bond buying for countries stay within conditional budget constraints. Over at Forbes Agustino Fontevecchia is not optimistic about Draghi’s supposed plan’s ability to solve the crisis:
Whether markets will take Draghi’s comments as the sign of a coming bazooka and rally, or as a complete disappointment and break down, is anyone’s call. The initial reaction to Draghi’s verbal intervention was negative in mid-July, only to spark a month-long rally that has seen the single-currency climb back to multi-month highs. But the legal and logistical aspects of saving the Eurozone take time, and this means even Draghi can’t provide a solution, just kick the can as far down the road as he can.
At the Washington Post’s WonkBlog Dylan Matthews thinks that what Draghi will almost certainly announce will be too small a step in the right direction, as many countries will not be able to meet the ECB’s conditions for bond transactions:
To be blunt: Spain is not going to meet those standards. This year, it’s on track for a 6.3 percent of GDP deficit, almost double the target. It must either start growing much faster, or institute draconian austerity measures that will cripple growth, to meet the 3 percent figure. So it’s unclear whether this new policy means Draghi will buy up Spanish bonds at all. By contrast, Italy is on target, but even then, its fiscal consolidation risks hurting growth which in turn grows future deficits, which could endanger its fiscal standing going forward. And with the ECB committed to not printing new money to finance its bond purchases, Spain and Italy won’t be getting a growth boost from the bank.
So Draghi’s latest plan gets closer to a policy that can avert disaster. But it probably doesn’t get close enough.
With Spain and Italy missing the fiscal targets that will probably be conditional for bond transactions it is hard to see how beneficial Draghi thinks this new scheme will be. We will have to wait until tomorrow to find out.