Saving the euro

Article by: EDITORIAL , New York Times
Updated: September 7, 2012 - 8:03 PM

The newest plan is an improvement.

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Euro sculpture at the European Central Bank in Frankfurt, Germany.

Photo: Michael Probst, Associated Press

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It took a while, but on Thursday, Mario Draghi, the president of the European Central Bank, explained what he meant last July when he said he would do whatever it takes to save the euro.

Largely as expected, Draghi said that the ECB plans to buy government bonds issued by troubled eurozone nations, a strategy to hold down borrowing costs in countries like Spain and Italy and, in the process, buy them time to rebuild their recession-racked economies.

What wasn't fully anticipated was the bleak economic backdrop of the announcement. The ECB revised its projections downward to show a contraction in the eurozone this year of 0.2 percent to 0.6 percent.

The Organization for Economic Cooperation and Development also downgraded its assessment, saying that the eurozone recession would worsen in the second half of 2012 while growth in other developed nations, including the United States, would continue to be slow.

Financial markets mostly ignored the pessimistic forecasts, instead rallying on the ECB's pledge of a new rescue effort. But the broader economic picture underscores the urgency -- and limitations -- of the latest move.

The new program is an improvement over previous central-bank interventions. Notably, there will be no preset limit on the bond purchases, reducing worries that the help will not be sustained enough to make a difference. Nor will the ECB insist that it be first in line to be repaid, allaying fears that private creditors would be disadvantaged by its new bond purchases.

And while the governments in trouble will have to ask for aid and, in exchange, agree to undertake economic and fiscal reforms, there is reason to hope that such reforms will not be as backbreaking -- and counterproductive -- as those imposed on Greece and other bailed-out nations.

The European Central Bank put forth the new plan over the objection of the German central bank, a big champion of austerity. That could indicate that the bond purchases will not be coupled with the same kind of severe austerity that has characterized rescue efforts so far.

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