Markets are disappointed. Investors had been hoping that Mario Draghi’s July 26 commitment to do ‘whatever it takes’ meant he would fire on Thursday. He didn’t. But, as Draghi suggested, Europe’s policy-makers do have unused weapons. The euro zone, for all its profound problems, is more resilient than it might seem. The global economy may be, too.
The options open to Draghi are problematic and controversial, but potentially potent. Draghi hinted at another, and potentially larger, secondary market bond buying programme to bring down Spanish and Italian bond yields. A still more potent medicine would be buying of debt issuance by the governmental bail-out funds.
What would such bond-buying achieve? It would not be a fundamental cure for the Spanish or Italian economies. And in excess it could deter the painful reforms these countries need. That is one reason for German reluctance to spray around cash, governmental or central bank. But bond-buying would buy time for the euro periphery nations to address their fiscal and competitiveness problems. The ideal policy would be to buy enough bonds to reduce both the risks for the ECB and the strain on core economies, but not enough to reduce the pressure on periphery countries to reform.
Meanwhile, the euro crisis weighs on the world. Global manufacturing activity fell for a second month in July, with the euro zone contracting markedly. That the zone might drag down the rest of the world is a major worry.
But for now, at least, global growth is no worse than weak. Recent China and US monthly manufacturing indices show stagnation, not deep decline. The latest US housing and consumer confidence data are better than expected. As Draghi recently pointed out, the US is not a small, trade-driven economy; it has its own momentum. That momentum may grow as housing recovers and lending revives.
The prospect for the second half of the year is that the euro zone will keep grappling while global growth persists and perhaps picks up. That isn’t what it takes to make markets celebrate. But neither is it depression, euro collapse or disaster.
