While an open-ended commitment by the ECB could buy time, the starting point for any solution to the euro crisis must address the large differences in competitiveness between the peripheral economies and the rest.
They cannot improve competitiveness without a large internal devaluation (austerity), although this just compounds the debt problem. Only full mutualisation (sharing) of national debts will remove convertibility risk, but such a leap looks very unlikely and depends on sustained support from electorates.
Germany’s mantra remains “no common liability without common control”. Deeper fiscal union will mean permanent transfers from core to periphery (north to south), rising inflation in the core and higher government deficits.
For most northern European governments and their voters, this is a step too far. Ultimately the political capital backing the euro is only as secure as the votes that politicians can secure. Those who are deemed too pro-European may find themselves out of office.
Italian Prime Minister Mario Monti claims to have “no doubt that the night before the disintegration of the euro, the ECB will do whatever is necessary to save it”.
The ECB will not intervene until countries in need request a bailout from the rest and for that to happen things will have to deteriorate from here. And so the saga goes on.
