Shadow Government

Will Mario Draghi's eurozone fix backfire?

The conquering of the euro crisis seems like something out of a fairy tale. Faced with a gut-wrenching peril, our hero closes his eyes and chants an incantation: "Whatever it takes!" Suddenly, once-insurmountable troubles melt away and everyone lives happily ever after.

So what happened? Was it all in our minds? Was the episode anything more than a panicked bunch of bond traders, stampeding toward a precipice but now safely pacified and redirected?

As last summer turned into fall, Italy and Spain were wobbling. The two countries -- the third and fourth largest economies in the eurozone -- saw their bonds shunned by global investors. For the heavily indebted pair, a bond sell-off meant that interest rates rose and disaster loomed. At some point, the high price of borrowing would become unbearable. The eurozone nations had gathered funds to try to avert a crisis, but the sum would not be enough to cover the needs of such large member economies.

Then Mario Draghi, head of the European Central Bank, stepped in to save the day. He announced that the ECB would do whatever it took to save the currency. If extra funds were needed, the ECB would provide them through a program it called Outright Monetary Transactions -- the unlimited purchase of troubled nation bonds once those countries asked for help.

The effect of his announcement was dramatic. Bond yields fell as buyers relaxed. While the previous bailout fund might have been limited, the ECB's ability to print money and buy bonds was not. The restoration of calm was so successful that the ECB did not have to actually do a thing -- the mere announcement that it was willing to act relieved the pressure on Spanish and Italian borrowing.

It is hardly a novel idea to think that a dangerous market panic could be settled by words alone, so long as those words were credible and uttered by the right person. So, do we mark this up as an instance of judicious intervention? A daring move by Mario Draghi that saved the European project and merited his selection as the Financial Times' Person of the Year?

Maybe. The problem is that the sovereign debt problems plaguing Spain and Italy were only one part of a multi-dimensional crisis. The other problems remain, two in particular. First, the untenable contradictions of the eurozone's approach to banking have not been resolved. Second, the beleaguered countries along the eurozone's periphery are being asked to endure potentially unbearable levels of unemployment and economic stagnation.

The banking problem can seem the most obscure part of the problem. Yet as the global financial crisis demonstrated, the provision of credit is the lifeblood of an economy. Cut off credit and economic asphyxiation sets in quickly. Europe's additional discovery was that, in a single currency zone, money could flow very rapidly from any bank perceived as risky to others perceived as safe. Any hint that a bank's host country might leave the euro or that the bank might have gorged itself on dubious sovereign debt would be enough to start the exodus of funds. No funds, no credit, no economic activity.

Eurozone leaders resolved to fix this with a banking union. And then they ran into politics. Banking regulation is sensitive. There was little appetite for ceding control. Last week, discussing a recent bilateral move by France and Germany to coordinate their banking policies, the Financial Times' Wolfgang Münchau wrote:

"My suspicion is that the ultimate intent of the Franco-German legislation is to secure the position of their national champion banks ... The most important signal sent by the unilateral legislation in France and Germany is the lack of political will to sort out the banking mess, which is at the heart of the eurozone crisis. Instead, governments are seeking refuge in symbolic gestures ... The renationalisation of banking means that the monetary union is as unsustainable today as it was in July last year -- and now the policies needed to fix this problem have been abandoned."

This was one danger of Draghi's move. By alleviating the sense of impending doom, he also may have undermined the impetus for overcoming entrenched opposition to reform.

The growth and unemployment situation is not much better. A story this week, contrasting positive Spanish sentiment with dismal performance, detailed the economic turmoil in the country:

" the last quarter of 2012 ... the number of companies declared bankrupt soared by almost 40 per cent to 2,584. It was the highest number since the crisis began, suggesting that the situation for credit-starved Spanish companies is not only getting worse -- but getting worse faster than before ... Nor has there been any sign of a turnround in Spain's dismal unemployment numbers, which continue to rise towards 6 million, or more than 26 per cent of the workforce ... The IMF expects a drop in GDP of 1.5 per cent this year -- a worse recession than in 2012."        

We also come upon another danger of Draghi's move: By restoring confidence in the euro, he paved the way for the currency to rise, which did no favors for eurozone exporters. That's hardly the cause of Spanish economic woes, but it is no help, either.

And then, as always, the democracies of Europe have politics. Spain's governing party is caught up in a political scandal. Italy is moving back to electoral politics after a technocratic interlude. It is not clear that difficult political choices will get much easier in either case.

The list of eurozone perils is alarmingly long. Yet a remarkable sense of calm prevails in the markets. Perhaps this will be a crowd-pleasing story book ending, the sort in which impossible obstacles are overcome and everyone goes home happy. Or perhaps it will be the kind of story one rarely sees out of Hollywood, in which our blissful hero opens his eyes, only to find that he had dreamt his salvation and the threats remained, more menacing than before.


Shadow Government

'Lord, do not send us the pope we deserve'

Pope Benedict XVI's surprise renunciation of the Chair of St. Peter generated a tsunami of commentary usually reserved for events such as a presidential election or a Super Bowl. The pope's struggles with scandal dominated most stories, some of which noted that while these scandals were not of his own makings, they created an enormous burden for him.

The announcement has been greeted with dismay, resigned sadness, and hope in the pope's admirers, Catholic and not. David Goldman, a.k.a. Spengler, wrote, "As the shepherd of the founding institution of the West, Benedict personally embodied its best traditions. He is one of the last men living to have assimilated the fullness of European culture, a member of the ‘heroic generation' of Catholic theologians that included Henri de Lubac and Hans Urs von Balthasar."

The analysis of Benedict's papacy will roll on in the run-up to the conclave that will select his successor, and long beyond. The world's fascination with this office suggests that a pope plays many roles with influence beyond the Roman Catholic Church.

One such role is diplomat. The Holy See is an international personality of long standing, recognized since the middle ages. (The State of the Vatican City is a more recent entity, established in the 1929 Lateran treaties to resolve the status of the pope and his former territories in Italy). The Holy See has its own diplomatic corps, formal relations with 179 countries (including the U.S. since the Reagan years), observer status at the UN, and it is to the Holy See and its head of state, the pope, that arriving ambassadors present their credentials.

Pope Benedict played this role effectively. Although some of his early trips were disturbed by awkward moments with the press, he learned. His 2008 visit to the United States, with stops in Washington and New York, was especially successful and was one of several encounters that cultivated a real friendship with President George W. Bush.

World leaders are eager to visit the pope. Certainly some of that eagerness is deference to Catholic constituencies at home. And, as probably the world's biggest distributor of aid to the poor in every land, the Church has a hand in human development that gives it shared interests with both donor and recipient countries.

In other cases, the substance of the meetings is more geo-political, as the Church deals with the persecution and plight of Christians in China, the Middle East, Pakistan, and elsewhere; faces concerns about encroachments on religious liberty in the United States and Europe; pursues unity within Christianity, including especially with the Orthodox Churches; and generally seeks the space to continue its ministries and activities. The story of Cold War cooperation between President Ronald Reagan, Pope John Paul II, and Prime Minister Margaret Thatcher is well told in John O'Sullivan's book, The President, The Pope, and the Prime Minister.

The Obama administration would be well served to consider all of this as it nominates a new ambassador to the Holy See, who will be received by a new pope.

But diplomat was not the role most cherished by Benedict. He was first a priest, second an intellectual force and phenomenally prolific theologian. He is one of the few people anywhere capable of debating, and changing the views of, a philosopher like Jurgen Habermas and co-authoring books with leading non-believing politicians such as Marcello Pera, former president of the Italian senate. Then a young priest, Benedict was a major influence in the Second Vatican Council and has spent much of his papacy clarifying the correct interpretation of that Council's teaching. He has constantly emphasized the vital complementarity of faith and reason to overcome fundamentalist extremism and secular nihilism.

Perhaps Benedict's most important legacy will be his writing during his papacy: his three volumes on the life of Jesus, his encyclical letters (especially Caritas in Veritate, or Love in Truth, and Spe Salvi, Saved in Hope) and his regular homilies. 

The betting has begun -- literally and figuratively -- on who will replace Benedict. The pope must be priest, teacher, diplomat, administrator, and reformer of a Church still recovering from self-induced tragedy and mismanagement, an arbiter of conservative and liberal viewpoints, authoritative yet gentle. As George Weigel writes in his recent book, Evangelical Catholicism: Deep Reform in the 21st Century Church, no sane person wants the job, much like the American presidency. 

And as we look around us these days, those of us who are Catholics might recall the traditional prayer cited this week by David Warren: "Lord, do not send us the pope we deserve."

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