Investors, economists, politicians and other policy-makers across Europe and the rest of the world are calling ever more urgently for the ECB to step in and buy European government bonds. With the EFSF a clear bust, large-scale ECB intervention looks the only way to prevent a financial market meltdown in Europe with potentially disastrous consequences for the global economy.
Speaking before the European Parliament today, ECB president Mario Draghi laid out some clear conditions for any such escalation of its Securities Markets Programme.
What I believe our economic and monetary union needs is a new fiscal compact a fundamental restatement of the fiscal rules together with the mutual fiscal commitments that euro area governments have made.
The tantalizing prospect is that the ECB will act, as long as governments play their part. Draghi says:
Just as we effectively have a compact that describes the essence of monetary policy an independent central bank with a single objective of maintaining price stability so a fiscal compact would enshrine the essence of fiscal rules and the government commitments taken so far, and ensure that the latter become fully credible, individually and collectively.
Would the mere announcement of such a new fiscal compact, perhaps at the European summit on December 9, be enough to stabilize markets? Draghis answer is that it is definitely the most important element to start restoring credibility. So there could be another element that the ECB might provide? It looks like we are getting close.
Euromoney reports in depth in the cover story of its December issue on the intense debate around the ECBs potential role as a lender of last resort to European governments. The article examines its council members reservations about taking on such a role, the legal challenges they already face and the negotiations with governments going on behind the scenes. It outlines what is at stake and why the pressure on the ECB to act soon will remain unrelenting. Dario Perkins, economist at Lombard Street Research, tells Euromoney: There might come a point, if it doesnt, when theres not much of a eurozone economy left to be the central bank of.