The attention of Americans has been consumed the past weeks by extreme weather and extreme politics. The quadrennial convention ritual is as much a media fest as a political one, and the focus on the presidential election is merited. But while Presidents Clinton and Obama garnered attention, perhaps the most important event this week had nothing to do with American politics. It was instead the announcement by the head of the European Central Bank, the Italian technocrat Mario Draghi, that the bank was prepared to provide nearly endless funds to troubled governments provided only that they first promise to get their economic houses in order.
It doesn’t take genius to figure out why yesterday’s press conference and announcement by Draghi was lost in the media fray. Elections make sense; central-bank announcements replete with jargon, arcane policies, and acronyms do not stir souls. Wall Street and the financial world, however, were waiting on Draghi’s appearance with all the fervor of teens at a Justin Bieber concert. And they reacted to the announcement with measured delirium, sending equities to their highest levels in nearly four years.
For the general public, however, Draghi may not have made the top 10 of important stories, well below the Giants-Cowboys game, the rollout of the new Kindle and anticipated iPhone, and certainly behind the conventions. Today, the jobs report will garner attention, and should. Even in Europe, Draghi’s decision received less focus than equivalent moves in America by the Federal Reserve, and most European media outlets led with Obama. But this is one news story whose importance is not conveyed by its prominence.
Since the spring of 2010, the financial world has been intermittently paralyzed by euro fear. The rolling crisis, spreading across Europe from Ireland to Portugal, and of course Greece, before touching down in the much larger and equally troubled markets of Spain and Italy, has crimped the global economy, hampered economic activity for companies around the world, and seemed so intractable that it has created an almost permanent climate of cynicism, short-termism, and expectations of systemic collapse. The inability of the member states of the Eurozone to manage the crisis of soaring borrowing costs for indebted governments, little or no growth, rising unemployment, and radically different perspectives on the need to spend urged by Spain, Italy and France and the need to save and reduce debt articulated by Germany has brought not just the Eurozone but the entire financial system to a standstill.
Yes, the world has other issues—the viability of China’s growth and the still-unresolved issue of rising American debt and anemic growth. The euro crisis also follows the housing and derivative meltdown of 2008, and is that much more acute because of that context. But the world always has issues, and growth nowhere is constant and linear, even if people unreasonably expect and hope that it will be. The globally interconnected world of finance that evolved between the late 1990s and 2008 is one where there are no circuit breakers, and where even a country the size of Greece can imperil systems as large as the United States and the entire Eurozone simply because no one can say with confidence where or when the financial dominoes will stop falling—once they stop.
That is why central banks have such a crucial role in stemming these crises. Widely derided for their miserable management of the financial world of the 1920s that produced global Depression, central banks have never been popular. Americans fought over the banks’ establishment of a central bank in the 19th century, and significant parts of the electorate see the Federal Reserve as a rogue institution that should be abolished or curtailed (see Ron Paul and Rick Perry).
In Europe, the European Central Bank is a much newer institution, but still manages to engender strong feelings. Many Germans fear that the ECB will undermine German sovereignty and expose it to commitments and obligations for other states’ debts. And throughout the world, many harbor suspicions that the actions of bankers will lead to the debasement of currencies, the salvation of the financial industry, high inflation, and the impoverishment of the working class.
Yet in a system that depends on the willingness of markets to extend credit, and the faith that governments will not default, the role of central banks in providing security and stability cannot be underestimated. No, the ECB and the Federal Reserve cannot substitute for legislatures and for society as a whole. Central banks cannot force governments to make wise decisions about spending or lending. In the jargon of finance, monetary policy (which banks control) cannot solve fiscal policy (which is the province of governments and legislatures).
Banks are uniquely positioned, however, to keep the system functioning. They cannot create organic growth and innovation there is none, but they can, as Draghi seems to recognize brilliantly, ensure that the deficiencies of politicians, the limitations of governments and the unreasonable of people do not completely torpedo social stability. Bankers are the last of the elites, and while they are fallible and do fail, they have in the past four years been one of the bright spots in a global system that is otherwise littered with darkness.
Draghi’s announcement yesterday will not be the end of l’affair euro, but it may well mark a turning point. During World War II, the 1944 Normandy invasion was not the end of the war, but it was the beginning of the end. There have been so many false starts in the euro crisis that it feels like tempting fate to declare an inflection point, but no one rings a bell at the bottom. What just happened in Europe, care of a measured, serious technocrat, could be another false start, but for the first time in a long time, there’s reason to believe that this crisis may be winding down.
It will be years before Europe’s economies work through their multiple issues, and the same might be said for much of the rest of the world. But that cannot even begin in a climate of constant fear and anxiety. Draghi has not healed the wounds of Europe or the world, but he has given us all an immense boon: he has said a resounding no to collapse, and thereby created space—vital space—for that healing to occur.