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Central Banker Calls Euro Zone Structure ‘Unsustainable’
Published: May 31, 2012 114 Comments
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The E.C.B. has tools to spur governments to action but must use them carefully. Mr. Draghi can use rhetoric as he did Thursday. He also can use the E.C.B.’s role as lender of last resort to banks, which effectively gives the bank power of life and death over financial institutions.
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That power was inadvertently on display Thursday. Mr. Draghi disclosed that the E.C.B. had resumed normal lending to Greece’s four largest banks after they received a fresh infusion of European bailout money. That should at least temporarily ease fears of bank failures in that country before its election on June 17.
In May, the E.C.B. cut Greek banks off from credit because they had exhausted their capital reserves — their financial safety cushions — and were no longer eligible to receive the credit under the central bank’s rules. The Greek banks continued to receive money from the European system of national central banks, but through a separate program known as emergency liquidity assistance.
As deposits continue to flow out of Greece and Spain and fears of a bank run rise, Mr. Draghi underscored the E.C.B.’s determination to make sure that solvent banks not fail because they are temporarily short of funds.
“The E.C.B. will continue lending to solvent banks,” Mr. Draghi told a committee of the European Parliament. “We will avoid bank runs by solvent banks.”
Still, the situation illustrated how dependent Greece is on the E.C.B. If the E.C.B. cut off funding, Greece’s banking system would collapse, and the country would probably have to leave the euro.
European leaders say they agree with Mr. Draghi on the need for a more centralized euro zone.
“I have always said we need more Europe,” Chancellor Angela Merkel of Germany told reporters in the German coastal city of Stralsund on Thursday, hours after Mr. Draghi spoke.
But she did not sound as if she would be able to deliver major changes soon.
“There are integration steps that require treaty changes, and we are not there yet today,” Ms. Merkel said.
Mr. Draghi’s powers are also limited, by the E.C.B.’s charter and conservative members of the bank’s 23-member governing council. Unlike his counterpart Ben S. Bernanke, the chairman of the U.S. Federal Reserve, for example, Mr. Draghi cannot buy government bonds on a vast scale.
While the E.C.B. can make sure that banks have enough money to operate from day to day, Mr. Draghi said, it cannot replenish depleted capital reserves. Nor can it solve the problem of excessive government debt or the inability of countries like Greece to compete in international export markets, he said.
Underlying the euro zone crisis are underperforming economies that lack the basic requirements to create jobs or foster innovation, like modern universities or functioning government institutions. Just getting an electricity connection takes an average of 77 days in Greece, according to the World Bank.
“Can the E.C.B. fill the vacuum left by lack of euro area governance?” Mr. Draghi asked. “The answer is no.”
Almost daily, new data illustrate that time is running out for political leaders to act.
On Thursday, the Bank of Spain revealed that investors had withdrawn €66 billion, or $81.7 billion, from the country in March, almost double the previous record monthly withdrawal of €34 billion last December. The statistics, however, do not reflect the most pressing problems faced by Spain, led by the cost of nationalizing Bankia, a giant mortgage lender.
With the Madrid government struggling to impose fiscal discipline on Spain’s regions, Fitch, the credit ratings agency, downgraded eight of the 17 regions on Thursday. Fitch said that the rating cuts reflected the fact that these regional deficits “will require considerable additional efforts to be reduced, and also the difficulties in accessing long-term funding.”
In unusually detailed criticism of Spanish leaders, Mr. Draghi cited Bankia as an example of how indecision by political leaders has made the crisis worse. It took too long for Spanish authorities to deal with the problems at Bankia, he said.
“Everybody winds up doing the right thing at the highest possible cost and price,” Mr. Draghi said.
Nicholas Kulish contributed reporting from Berlin, Raphael Minder from Madrid, Paul Geitner from Brussels and Liz Alderman from Athens.
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A version of this article appeared in print on June 1, 2012, in The International Herald Tribune.
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