When Mario Draghi, the president of the European Central Bank (ECB), publicly proclaimed that the ECB would do “whatever it takes” to ensure the future stability of the euro, the effect of his remarks was immediate and remarkable. Borrowing costs fell dramatically for the governments of Italy and Spain; stock markets rallied; and the recent decline in the external value of the euro was suddenly checked.
It remains unclear how long-lasting the effects of Draghi’s intervention — or of the public support offered to him by German Chancellor Angela Merkel, French President Francois Hollande, and Italian Prime Minister Mario Monti — will prove to be. What we can say with certainty is that Draghi’s remarks and the reaction they evoked demonstrate that the fundamental problems of the eurozone are not primarily financial or economic; they are political, psychological and institutional.
International observers took such notice of Draghi’s commitment to do “whatever it takes” to save the euro because so many of them have come to doubt other leading European players’ commitment to do likewise. (Some of these doubts are, of course, politically or financially self-serving; a certain model of financial capitalism perceives the euro as a threat, and its adherents will do everything they can to bring about its demise.)
However, eurozone leaders’ inability to assuage doubt about their commitment to the euro after two-and-ahalf years of crisis suggests that the problem is deeply rooted. In their own defense, eurozone ministers point to the raft of reforms that they have introduced over the past 30 months, which will promote economic modernization, the restoration of sound government finances, and closer economic coordination.
Unfortunately, these reforms have all too often served as displacement activity — worthwhile in themselves, but failing to answer unambiguously the question posed with increasing urgency by international markets: Are the eurozone’s largest and currently most prosperous members absolutely committed to its continuation?
No one doubts that Germany and most other eurozone members would prefer the single currency to continue. Today’s uncertainty concerns whether this preference may be overridden by pressing considerations of national politics, or resentment at the slow pace of reform in certain eurozone countries.
Indeed, a German proverb to the effect that “trust is good, but control is better” has been the basis of eurozone leaders’ policy since the developed world’s debt crisis engulfed the single currency’s system of governance. The implication is clear: Trust between the members of the eurozone cannot be taken for granted, but must be earned and maintained.
The limitations of this approach have now been revealed. While the eurozone’s richer countries have indeed done much to help their troubled neighbors, they have done so in an obtrusively conditional, transitional and incremental fashion.
At one level, it is entirely understandable that Germany and other eurozone countries should demand assurances that their resources will not be wasted. However, this constant need for reassurance, for the limiting of risk and involvement to the minimum necessary, provokes a fear that at some point Germany and others will judge their partners’ assurances insufficient and the risks run in helping them intolerable. If that happens, the euro’s demise cannot be far behind.