Another ‘Critical’ Week for the Euro

It seems nary a week has gone by the last few years without being heralded as “critical” for the euro. (A point we question, since by definition, a week can’t be critical if they almost all are.) This week started no different—Sunday, DerSpiegel (citing unknown sources) reported the ECB was preparing to cap PIIGS’ yields by buying their bonds in the open market.

The report was met with alarm from German politicians and its inflation-wary central bank—which released a statement frowning on such a maneuver. On the other hand, Spanish pols, on hearing the rumor, widely lauded it; Spanish Finance Minister Luis de Guindos reaffirmed his government wants the ECB to commit to open-ended debt purchases before Spain asks for additional financial assistance. That, of course, would be a better deal for Spain and would alleviate the need for them to subscribe to a politically difficult formal austerity program, ü la Greece.

The ECB, not wanting to ruffle feathers or increase speculation by remaining mum (as it typically does), released a statement disavowing the rumor. Which is fine, and they can say what they want. But, lest we forget, the ECB has in fact already directly bought bonds on the open market (which did not please the Bundesbank). The Securities Market Programme (SMP)—started in May 2010 but idle since February 2012—was used to directly purchase PIIGS’ debt. In fact, the ECB still has about €211 billion in PIIGS’ debt on its balance sheet. What’s more, last month, ECB President Mario Draghi said the ECB would do “whatever it takes to preserve the euro”—a statement many took to mean restarting direct bond purchases or granting the EFSF/ESM a banking license to do so.

To be sure, whether the ECB restarts the SMP or grants the EFSF/ESM a banking license (to effectively accomplish the same thing), neither is a silver bullet that cures all that ails the eurozone. Nor can we speculate on the likelihood of either at this point. But the main message here continues to be that eurozone politicians, officials and citizens have invested tremendously in the common currency and continue to have the resolve to prevent a disorderly breakup—despite much infighting along the way. And politicians have tremendous incentive to say one thing, then do another.

Greece—not to be left out of eurozone water cooler talk—was reported to be €2.5 billion short of its cost-cutting target to satisfy international conditions for its emergency aid package. This news coming just ahead of Greek Prime Minister Antonis Samaras’s round-robin meetings this week with eurozone politicians and officials to drum up support for a two-year extension to make necessary cuts. And some are losing their patience. This past weekend, German Finance Minister Wolfgang Schäuble said, “We can’t put together yet another program,” adding that it was irresponsible to “throw money into a bottomless pit.” But there were equally loud voices elsewhere vowing to keep the eurozone intact. Eurogroup President Jean-Claude Juncker noted, “An exit will not happen, unless Greece were to violate all requirements and not stick to any agreement.” A remark that perhaps best alludes to eurozone officials’ stance of extreme flexibility.