Cause and Effect in European Politics and Law

Oops! ... They did it again!*

Ralitsa Kovacheva, August 10, 2011

In May 2010, when the European Central Bank started to buy Greek bonds and later - Irish and Portuguese ones, it argued that this would be a single action. But now it is happening again - this time the ECB is buying Italian and Spanish debt. Generally, European media are critical to ECB's decision to reactivate its Securities Market Programme (SMP) for two main reasons. The first is that in the case of Spain and Italy, there is a much larger amount of debt, which the ECB is unlikely to cope with. The second is that the decision calls into question the institution's independence.

“By bending to pressure, the ECB is allowing itself to become a political central bank, making it look more and more like its American counterpart, the Fed”, German magazine Der Spiegel commented.

Its “compatriot” Bild wrote that “the ECB is upside-down”, because instead of euro countries safeguarding the euro with their deposits, “now the ECB is safeguarding the survival of the indebted euro states … In fact the ECB is supposed to be a beacon of reliability. But the central bankers' buying spree on the debt market is an admission of their helplessness vis-à-vis equally helpless politicians. The once proud European Central Bank has become the European Last Resort Bank. This can't go on much longer!”

Danish liberal-conservative daily Jyllands-Posten also believes that buying bonds is a bad idea: “No doubt many investors want to dump their Italian and Spanish bonds and buy German ones instead, for example. The ECB hardly has the resources to resist sustained pressure to sell.”

According to Finish newspaper lkka the ECB is just trying to gain time, but this is not a sustainable solution. The newspaper's comment is much similar to euinside's opinion, expressed many times since the beginning of the debt crisis: “Until now voters in the Western countries have been satisfied because frivolous promises were paid for with cheap loans. Now we're in for a rough ride because borrowing is being stopped, the bubbles are bursting and the bill must be paid. But no one has been able to say how that's supposed to happen in an orderly way.”

In a comment, titled Desperate Measure For Desperate Times”, The Financial Times also justifies the ECB's actions which, unlike the European politicians, is “the only eurozone institution to match such slogans with actions”. According to newspaper, the main purpose of buying Italian and Spanish bonds is “to pre-empt a bond buyers’ strike which would send Madrid’s and Rome’s borrowing costs spiralling out of control”. But “leaving the ECB to address it alone is politically and economically too risky”. Moreover, because “should it come to the worst, any significant ECB losses on the SMP would have to be met through a politically toxic recapitalisation.”

As euinside wrote recently, solving the crisis needs voters to be convinced to support the necessary measures. “That is something only politicians, not central bankers can do,” The Financial Tines wrote.

*Inspired by Britney Spears' song Oops! I Did It Again