A Terse Warning for Euro States: Do Something Now

Mario Draghi, the European Central Bank president who pulled the Continent back from the financial brink late last year, is facing an even more daunting challenge as the debt crisis in Spain deepens. But this time, he may have a harder time fashioning a rescue plan that will work.


In a warning to political leaders, Mr. Draghi told members of the European Parliament on Thursday that the central bankis reaching the limits of its powers and now it is up to politicians to move quickly and decisively because the survival of the euro , the Continent’s common currency, is at stake. The structure of the currency union, he said, had become “unsustainable unless further steps are undertaken.”

The note of frustration and urgency in Mr. Draghi’s voice was a sharp contrast to six months ago, when he took over as central bank president and eased the crisis with what was considered a bold easy-money plan that extended some $1.3 trillion in low-interest loans to large banks throughout Europe to restore confidence.

But the success of that plan has been short-lived, underscoring the far more limited authority he has compared with what the Federal Reservechairman, Ben S. Bernanke, had at the height of the financial crisis in 2008. And the few options at Mr. Draghi’s disposal help explain why pessimism is growing about Europe’s ability to contain its crisis.

Europe’s problem, much like in the United States in 2008, is that its financial system is fraying. Troubled countries and weakened banks alike have difficulty borrowing money to sustain their operations as nervous investors pull back from risk.

The solution to the 2008 crisis, orchestrated by Mr. Bernanke along with the Treasury secretary, Henry M. Paulson Jr., was to flood the banking system with hundreds of billions of dollars while buttressing the system with many other measures to calm investors.

Mr. Paulson famously got down on bended knee to persuade reluctant and divided Congressional leaders to approve the plan. It wasn’t an easy sell, but without the infusion of cash, the financial crisis in the United States would probably have been much worse.

Europe similarly needs a robust rescue plan, but Mr. Draghi has to overcome even more obstacles than his American counterparts because Europe has many different countries with many different interests, issues and priorities. Mr. Draghi, a dignified Italian and an economist by training, is not the type to be a supplicant like Mr. Paulson, a former Wall Street banker, was in 2008.

But even if he were, whom would he beseech for action? At least Mr. Paulson, as head of a national treasury, knew whom to convince. The euro zone has 17 heads of government and 17 parliaments, not to mention the relatively powerless European Union executive branch and the European Parliament that was Mr. Draghi’s audience Thursday.

In what may have been his most blunt criticism of political leaders since he took office in November, Mr. Draghi said that half-measures and delays had made the euro zone crisis worse. He said the leaders needed to decide what kind of euro zone they wanted, and fast. “Dispel this fog,” he said.

Mr. Draghi is among the most powerful figures in the euro zone drama, as head of the only institution with both huge financial resources and an ability to make decisions without a laborious political process. Government leaders, wary of the political cost, have looked time and again to the central bank to deliver relief.

But Mr. Draghi said Thursday that the crisis now demanded solutions that could only come from political leaders — like creation of a Europe-wide deposit insurance program. Such a system, like deposit insurance in the United States, would reassure bank customers that their money was equally safe in any euro zone country, and that might prevent the sort of money flight that is now sapping Spain. He also backed calls by European Commission leaders on Wednesday for a more unified banking system. But he has no authority to affect change, as only the lawmakers of the euro zone countries could together create such a deposit insurance system.

“From the ECB’s perspective, the next iteration of crisis management largely falls on the shoulders of member states,” said Mujtaba Rahman, a euro zone analyst at the Eurasia Group. “Arguably all the incremental plays have been exhausted.”

There have been many spikes in the euro zone’s fever, of course, with a bailout here or a stopgap measure there seeming to calm things for a while. But this time, Europe may have reached a moment when the currency union’s survival depends on a powerful, convincing response.

Greece, progenitor of the debt debacle, is in political turmoil again, and this time it is in danger of dropping out of the euro zone altogether. Spain, with one of the region’s largest economies, is in the grip of a banking crisis, and there is a growing sense that the danger to Spanish banks is of a different order of magnitude from that in suffering-but-small Greece.

The clearest danger signal may be the euro currency itself. It is at a near two-year low against the dollar, as investors who can do so are pulling out. On Thursday, the Bank of Spain revealed that investors had withdrawn 66 billion euros, or $81.7 billion, from the country in March, almost double the previous monthly record of 34 billion euros 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.

Mr. Draghi has tools to spur governments to action but must use them carefully. He can use rhetoric as he did Thursday. He also can use the central bank’s role as lender of last resort to banks, which effectively gives the bank power of life and death over financial institutions.

That power was inadvertently on display Thursday. Mr. Draghi disclosed that the central bank 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.

“The ECB 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 central bank. If Greece were cut off, its 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 — but structural changes that could strengthen the euro zone for the long term may not do much to help in the short term.

“I have always said we need more Europe,” Chancellor Angela Merkel of Germany told reporters in the German 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 bank’s charter and conservative members of the bank’s 23-member governing council. Unlike Mr. Bernanke, for example, Mr. Draghi cannot unilaterally pump large amounts of money into the financial system by buying government bonds.

Moreover, while the central bank can make sure that banks have enough money to operate from day to day, Mr. Draghi said, it cannot replenish their 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 ECB fill the vacuum left by lack of euro area governance?” Mr. Draghi asked. “The answer is no.”