Are Eurobonds Inevitable?

Solving the Euro crisis has been mainly on trying to talk about the bazooka, the whatever it takes and other empty phrasings. The question is, are Eurobonds inevitable? More on the subject via John Quiggin.

“Whatever it takes.” Those were the words followers of the euro zone have been waiting to hear ever since Mario Draghi replaced Jean-Claude Trichet as head of the European Central Bank. To spell out the quote in full, Draghi said: “The ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”

Central bankers are famously gnomic in their utterances. This is, however, about as unambiguous as they ever get. Jean-Claude Trichet used exactly the same phrase in reference to his determination to put inflation control ahead of all other objectives, and he demonstrated it with policies that came to the edge of destroying the euro in order to save it from inflation. Draghi’s choice of words therefore amounts to, at the minimum, a sharp change of course.

Of all the actions open to the ECB, there is only one that is sufficiently big, and sufficiently controversial, to justify Draghi’s statement. That is a decision to buy the bonds of EU member states, if necessary printing euros to do so, and accepting the risk of higher inflation.

The same policy of quantitative easing has been adopted in Washington and London. Monetary expansion is not sufficient to promote a strong economic recovery (that would require a renewed round of fiscal stimulus combined with further long-term measures to strengthen the budget), but it’s necessary to avoid the kind of deflationary spiral now being observed in Europe.

The need for such a statement right now reflects that catastrophic economic situation in Spain. Despite years of painful austerity, the Spanish government shows no signs of being able to service the debts created by the global financial crisis and a series of bank rescues. So far, the direct budgetary savings generated by austerity have been more than offset by the loss of revenue that is an inevitable consequence of contractionary policies applied to an already depressed economy. The news that Spain, like the UK, is now in a “double-dip” recession confirms the failure of austerity.

Full article here.