It’s a bit of a cliché at this point to note that events in the Eurozone may have a bigger impact on U.S. politics than anything at the conventions, but it’s true nonetheless. And so far this week has brought some very good news. Mario Draghi’s plan for potentially unlimited conditional bond purchases by the European Central Bank has sent stocks soaring and yields plummeting on peripheral bonds even as German debt yields rise slightly on economic optimism.
To interpret this correctly I think you need to neither overstate nor understate the significance of a couple of days of market optimism.
Against underestimation. Some will dismiss this noting that we’ve seen ECB rallies before. And so we have. But these rallies are telling us something important. Market participants are firmly convinced that the ECB can solve this problem if it wants to. Not solve all problems. Not turn southern Europe into a magical paradise of unicorns and prosperity. But solve the particular problem that’s been afflicted Europe for the past few years. Whenever it looks like the ECB has decided definitively to solve the problem, markets soar.
Against overestimation. This isn’t what the ECB has done. Mario Draghi very truly and sincerely wants the peripheral states to submit to his will. The message is that if your country acts nice like Ireland, the ECB will do everything in its power to help you along the way. But if you refuse, you’ll be zapped by its economy-destroying laser.
So the question is will Spanish Prime Minister Mariano Rajoy submit to what Draghi wants, formally request a Troika bailout and submit to an IMF/ECB structural adjustment plan, or will he keep trying to play chicken? I sympathize enormously with Rajoy’s reluctance to give in. The ECB’s decision to use this crisis as the pretext for a massive power grab is, in my view, an outrageously immoral piece of misconduct with dire implications for the future of Europe. The situation is so bad that Silvio Berlusconi is making sense. All things considered, I think there’s a strong case to be made that Spain, Italy, and Portugal should just leave the euro rather than perisst on this course. But if they want to stay in the euro, then in a lot of ways I think the wise course is to simply surrender. The ECB really does have the problem to solve the problem or to make a solution impossible.
