NEW YORK TIMES
By JACK EWING and STEVEN ERLANGER
FRANKFURT — The European Central Bank on Thursday took its most ambitious step yet toward easing the euro zone crisis, throwing its unlimited financial clout behind an effort to protect Spain and Italy from financial collapse.
Mario Draghi, the president of the central bank, won nearly unanimous support from the bank’s board to buy vast amounts of government bonds, a move that would relieve investor pressure on troubled countries but also effectively spread responsibility for repaying national debts to the euro zone countries as a group.
The decision propels political leaders farther down the uncertain and winding road toward a Europe with centralized control over government spending and economic policy, instead of a collection of nation states that sometimes seem to share little more than a currency and a slumping regional economy.
Mr. Draghi demonstrated once again that he may be Europe’s most powerful leader, perhaps the only one capable of brokering an accord among politicians whose national concerns and mistrust of one another have allowed the crisis to boil for two and a half years.
But there is a risk once again that monetary policy is moving faster than political leaders are able to create the institutions, such as a European bank supervisor, needed to ensure the survival of the common currency.
For the central bank itself, the pledge on Thursday to buy bonds from sovereign states, in conjunction with a fund financed by governments in the 17 European Union nations that use the euro, is a major evolution from its original narrow mandate to restrain inflation.
The bank and Mr. Draghi had the quiet support of all European leaders in taking this latest action, aimed at keeping bond speculators from driving Spain and Italy into budget-blowing borrowing costs. “The euro is irreversible,” he repeated several times Thursday.
Angela Merkel, the chancellor of Germany, voiced her approval during a visit to Spain on Thursday — a crucial victory for Mr. Draghi. But among German political leaders and citizens, widespread fear remains that they might some day wind up paying the bill if any country defaults on debt held by the central bank.
The bond-buying plan immediately reduced the financial pressure that had been building on Spain and Italy, even though those countries have not sought protection. The effective interest rate on Spanish 10-year bonds fell below 6 percent for the first time since May, and the corresponding Italian bond fell below 5 percent for the first time since April. American and European stock indexes also rose.
The central bank’s program will not solve the deep structural problems of the euro, Europe’s common currency. But it will buy time for the political leaders of the 17-nation euro zone to follow through on their past promises to discipline each others’ spending more closely and work harder to relax labor regulations and barriers to business creation that are regarded as impediments to growth.
“It takes away from the table an important risk in the short term,” said Lorenzo Bini Smaghi, a former member of the European Central Bank’s executive board. “Now I think the ball is in the hands of the governments.”
The central bank will buy bonds on open markets, without setting any limits, in contrast to an earlier bond-buying program that proved too hesitant to be effective. The bank said it would act only after countries agreed on certain conditions with the euro zone rescue fund, the European Stability Mechanism. That fund, known as the E.S.M., would buy bonds directly from governments, taking responsibility for imposing the conditions, while the central bank would intervene in secondary markets.
The backing of Ms. Merkel comes despite complaints from within her own coalition government — and from the head of the country’s central bank, the Bundesbank, Jens Weidmann. A former Merkel aide, Mr. Weidmann was the sole dissenting voice on the European Central Bank’s board against the bond-buying plan.
“He regards such purchases as being tantamount to financing governments by printing bank notes,” the Bundesbank said in a statement.
Ms. Merkel’s concern was that a bond speculators’ run on Italy and Spain, the third- and fourth-largest economies in the euro zone, would overwhelm the European bailout funds. And that, she worried, would pose a fundamental crisis for the euro union, possibly sinking the currency.
“What we really have here is a beginning of answering the question of how we deal with Spain and Italy,” said Jacob F. Kirkegaard, a research fellow at the Peterson Institute for International Economics in Washington. “How do we bail out these countries in a way that is sustainable as well as politically possible?”
As much as Germans may complain about the indebted countries of the south, the costs to Germany of a euro collapse would be enormous. And if Spain and Italy were shut out of the debt markets, the bailout funds would be too small to rescue them. So it was crucial that the central bank step in to insure that those large countries can continue to borrow at sustainable interest rates, acting as a ready lender through bond purchases.
The move toward greater unity and discipline, as promised in the last European Union summit meeting in June, will take months of negotiation, subsequent approval by parliaments and possibly even a rewriting of European treaties. And that could require constitutional amendments and referendums in some states, including Germany.
As it is, European leaders are waiting for a ruling next Tuesday by the German constitutional court on whether the permanent bailout fund — the E.S.M., which totals 500 billion euros or $630 billion — is acceptable under the German Basic Law. Most expect the court to go along, if reluctantly.
Mr. Draghi will probably continue to play a crucial role as moderator and power broker among national leaders, using his own diplomatic skills and the enormous financial resources of the central bank.
Still, he played down his role, repeating several times that the European Central Bank was simply fulfilling its mandate, and he rejected a suggestion that he was pushing forward European integration.
“I would think that would be a very ambitious objective,” he said at a news conference. “The broader political destinies of the euro area,” he said, are “very much in the hand of our leaders and much less in the hands of central bankers.”
Mr. Draghi did not give an exact starting date for the bond purchase program, but analysts at Barclays predicted that Spain would ask for help by the end of October.
A government that requests help must agree to a “macroeconomic adjustment program” with the E.S.M. But the central bank said this could be a precautionary program, implying that it would be less onerous than the programs accepted by countries like Portugal or Ireland, which were required to impose steep budget cuts that plunged them into recessions.
The central bank will also enlist help from the International Monetary Fund, which has more experience overseeing countries with debt problems. “The I.M.F. stands ready to cooperate within our frameworks,” Christine Lagarde, the I.M.F. president, said in a statement.
American officials had no immediate comment on the news. But they have conducted for years a behind-the-scenes campaign of shuttle diplomacy to urge Europe to do more, welcoming any steps to calm the markets. At the end of July, for instance, the Treasury secretary, Timothy F. Geithner, traveled to the Continent to meet with Mr. Draghi and Wolfgang Schäuble, the German finance minister.
The European Central Bank will buy bonds with maturities of three years or less, a strategy intended to keep elected officials from backsliding on promises to overhaul their economies. Those officials will have to face investors again in a few years.
The bank will withdraw as much money from circulation as it adds by buying bonds. This step, called sterilization, is intended to avoid any inflationary effect, though many analysts see no danger of higher prices when the euro zone economy is shrinking.
The central bank will not treat itself as a preferred creditor, entitled to get paid before other bondholders if a country defaults. But it will not take losses on Greek bonds it already holds, even though private creditors were required to do so.
The central bank also announced it would hold interest rates at their record-low level of 0.75 percent.
The bank has cut its main interest rate three times since Mr. Draghi became president in November, but he and other central bank officials have complained that market rates have remained stubbornly high in the countries most desperately in need of credit.
Jack Ewing reported from Frankfurt and Steven Erlanger from Paris. Melissa Eddy contributed reporting from Berlin and Annie Lowrey from Washington.
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