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ECB Head Draghi: Eurozone “Unsustainable” in Current Form

The head of the European Central Bank Mario Draghi said today that the structure of the Eurozone currency union was “unsustainable.” Aside from this being a reaction to pressure about the ECB’s conduct during the crisis, it appears to be an acknowledgment that the leadership is either unwilling or unable (I think the former) to take the necessary steps to prevent a catastrophe. It amounted to blame-shifting by Draghi, from the ECB to the member states.

Mr. Draghi, in what may have been his bluntest criticism of political leaders since he took office in November, said Thursday 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, a dignified Italian and economist by training, is not the type to go down on bended knee. But even if he were, whom would he beseech for action? At least Mr. Paulson, as head of a national treasury within a single government, 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 E.U. Parliament that was Mr. Draghi’s audience Thursday.

Mr. Draghi, in other words, was underscoring the differences between the European and U.S. financial systems that might explain why the United States was able to recover, however feebly, from its crisis by the end of 2009, while Europe’s has no end in sight.

The truth is that Draghi has more options than he wants to admit. He could call for a higher inflation target. He could accede to a variety of schemes that would amount to printing money to deal with sovereign debts. He could relieve the debt burden on the euros owed to the ECB. He could simply announce that the ECB will not let banks fail, through the lending capacity. He could announce that his organization will no longer participate in economy-crushing austerity deals with member nations.

Draghi isn’t totally wrong about how the creation of eurobonds or Eurozone-wide deposit insurance would ameliorate some of the crisis aspects. He’s right about “kick-the-can” solutions making the crisis worse. He’s right that Europe has to make the choice of total fiscal integration or an end to the euro experiment. But he’s not being square about the power of his institution, which is perhaps the most frightening element of all.

The ECB did resume lending to Greek banks today which alleviated a growing near-term crisis. But the “bank jogs” of capital flight out of the most troubled areas of the Eurozone continue. Draghi said the ECB would continue to lend to “solvent banks” to avoid liquidity issues. But he said little about Spain’s problems, where the government doesn’t have the funds to pay the bailout bills for its banking sector.

Draghi is right that the Eurozone is unsustainable. It’s just that he has the wrong ideas on how to sustain it.

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David Dayen

David Dayen