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European Central Bank head Mario Drogi
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has introduced yet another Eurozone
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rescue proposal on the surface at least
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this one appears to go much further than
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pass attempts it allows for the first
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time unlimited purchases of Eurozone
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member bonds provided that issuing
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countries adhere to strict economic
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reforms this offers the possibility at
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least of making the ECB a bank of Last
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Resort which some analysts have said is
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a necessary though not sufficient
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element to any successful reform Wharton
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Finance Professor Franklin Allen
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comments on the viability of the new
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proposal which faces some key challenges
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before and after any potential
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implementation so last week we had the
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big news from the European Central Bank
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that they were going to have this new
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program where they'll buy unlimited
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amounts of Eurozone sovereign debt
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provided a country signs up for some
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kind of program that's approved by the
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EU and the IMF in the way that's been
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done for the countries currently in
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program like Ireland and
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Portugal this is a big development
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potentially because the amount that
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they're willing to buy is unlimited
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everything up to now has had very strict
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limits on it now the first big issue is
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quite how will the conditionality work
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the notion is that it'll be similar to
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the countries that have so far had
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Direct Loans from the
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efsf but in practice it doesn't seem to
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be working that way so for
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example the prime minister of Spain
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seems reluctant to enter into any kind
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of negotiations his view is that the EU
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has asked him to do some things he's
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currently doing them the government is
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and they don't really need anything more
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and it seems that the Italians also are
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reluctant to have any kind of strict
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conditionality their view also is
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they're engaged in a very
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AER program already and that there
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shouldn't be conditionality over and
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above that now this is the big sticking
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point initially because what's always
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happened in the past with the EU is that
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when big countries have problems they
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use political means to get their way
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around it so for for example at the
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beginning of the stability and growth
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pact the first countries that were
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violating it were German Germany and
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France and there was no way that they
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were going to be allow allow themselves
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to be fine so they changed the program
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they suspended it and revised it to make
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it less
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onerous now what's happening in my view
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at the moment is exactly the same thing
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we're seeing the large countries use
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their political influence to water down
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any conditionality so that's the first
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problem the second problem is that once
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we get into this program and the ECB is
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buying what could be potentially very
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large
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quantities then if the country doesn't
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come through with the conditionality as
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judged by the governing Council what
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exactly are they going to do are they
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really going to stop buying and see the
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the yields shoot up and then the com the
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country potentially phas a run on its
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debt and pH tremendous problems it's
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difficult to see that they will actually
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Implement that so these are some of the
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problems that we face with this program
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it's an interesting step forward quite
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how far it'll go in solving the Euros
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crisis we'll see the the other big issue
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is that it doesn't address the basic
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problem which is it's slow growth the
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problem at the moment is not that the
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governments are paying too much much or
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or whatever the real problem is the Euro
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Zone's going into recession these
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countries on the periphery are not
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growing in fact most of them are
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shrinking at the moment and these
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policies are not going to change that in
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a dramatic way
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