ECB president, Mario Draghi, has
repeatedly claimed that the central bank will do everything necessary to save
the euro. Nothing has been formally agreed yet, but the ECB is expected to
announce a new government bond-buying programme following next week’s meeting
of its Governing Council. To have a significant impact on Italian and Spanish
borrowing costs, the latest effort must be big enough to dispel the
convertibility risk that lies behind the extreme polarisation of government
bond yields across the eurozone: investors are loath to hold Spanish and
Italian debt because they fear that the two countries’ membership of the
currency union might be unsustainable. Unfortunately, the ECB is highly
unlikely to do enough to convince investors that membership is unequivocally
forever, not least because the Bundesbank opposes any open-ended commitment to
cap borrowing costs.
Spain, Italy and the periphery
of the eurozone face unprecedentedly high real borrowing costs, which are
preventing a recovery in investment and hence economic growth. Without a return
to growth, they will fail to dispel investor fears over the sustainability of
their public finances and the solvency of their banking sectors. The Italian
and Spanish governments argue that their high borrowing costs largely reflect
convertibility risks and that the ECB should do as much as necessary to address
these fears. The eurozone’s members that currently benefit from exceptionally
low borrowing costs – Germany, Austria, Finland, the Netherlands and to a
lesser extent France – maintain that very high Italian and Spanish borrowing
costs largely reflect these countries’ failure to reform their economies and
strengthen their public finances. There is merit in both these positions, but
much more to the Spanish and Italian argument than the opposing one.
.jpg)
