ECB Eurozone Intervention ~ A Blessing Or A Curse?

Rumours are today sweeping the financial markets of a possible intervention by the ECB in the Eurozone crisis to attempt to lower the interest rates that countries like Spain & Italy are being forced to pay on their bonds.

Speculation about the plan seems to be having the desired effect with Spanish 10 year bonds dropping off their Euro era high of nearly 7.6% on Thursday to 6.6% as I write. We’ve seen this reaction in the markets time and again in recent years when bailout speculation surfaces. A brief relief in market turmoil is often quickly reversed as bailouts fail and fears intensify again, helping market traders continue their game of Pass The Eurozone Debt Bomb!

So will the ECB’s latest possible round of bond buying solve the Eurozone crisis or could it actually make it worse?

Trying to fix a broken back with painkillers!

Just as you can’t fix a broken back with painkillers, I feel that bond buying is the wrong medicine to try to cure the Eurozone of its debt crisis! As we’ve already said it may provide some temporary relief by lowering interest rates but the pain soon returns. The ECB can buy up as many European bonds as it likes but the debts of these Eurozone countries still remain the same. In fact by lowering the interest rates of these overly indebted nations the ECB could even be making the problem worse by allowing them to borrow further and get themselves into an even bigger mess.

Also the medicine being prescribed will never have the power to cure the financial illness! To date the ECB really hasn’t had the stomach for a bond buying program big enough in scale to have any lasting effect on financial markets. There are many economic and political reasons for this but the main ones are

  •  German opposition ~ Due to the hard memories of hyper-inflation after World war 1, Germany has always resisted any ECB intervention.
  • EU Treaty Restrictions ~ The ECB’s mandate doesn’t really allow it to get involved on the scale required to provide any lasting relief to the crisis. It is not the job of the ECB to finance the borrowing of countries, though many would argue this is what it has been doing for some time now.

Why ECB Intervention Could Actually Make Things Worse!

At some point European leaders are going to have to wake up and realise that the Eurozone crisis can’t be resolved by throwing good money after bad, or bad money after bad depending on how you look at it! By intervening and buying up government bonds the ECB is effectively propping up a failed system and a failed experiment in monetary union. The longer the ECB buys up government bonds shielding Eurozone countries from the effects of their actions and the longer it allows the Eurozone to continue on in its current form, the bigger the debts of these nations will become. This will only make the economic pain worse when the problem resurfaces in future years.

Then there are the potential inflationary pressures major intervention could create. The ECB would have to create any money needed to finance an intervention in the Eurozone crisis. Printing money in these vast amounts could cause massive inflationary problems, this is what worries Germany so much!

Finally there’s the worry that the ECB does intervene, buying up massive amounts of troubled government bonds in an attempt to resolve the crisis, but it doesn’t work! This could leave the ECB with massive amounts of worthless government debt threatening the financial stability of the ECB itself.

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3 Responses to ECB Eurozone Intervention ~ A Blessing Or A Curse?

  1. DebtsnTaxes says:

    I think it is just delaying the inevitable. Borrowing more money that is just going to be overspent isn’t going to solve anything. I truly believe the United States are heading on the same path that Greece has. They are just throwing bad money after bad. At some point the U.S. is going to have to increase revenues (tax increases) and decrease expenditures (social programs like welfare, food stamps and social security) which is something the rich and the poor don’t want to happen. It’s painful, but I see that as the only possible solution to the debt problem in Europe and the U.S.
    DebtsnTaxes recently posted..Preparing for the FutureMy Profile

    • Money Bulldog says:

      I definately agree with you but there are even problems with doing that. They have been trying to do it in Europe but the citizens of the affected countries won’t bear it. Then there’s the problem that those kind of cuts negatively affect economic growth, which makes the debt even bigger and harder to repay in real terms.

  2. This whole situation is a mess. As a bond purchaser, I’d be livid if this happened. I don’t blame Germany for it’s hesitations either.
    femmefrugality recently posted..Q: How Does Your Garden Grow?My Profile

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