Central banks and the 'spirit of 2008'
Update: This has indeed turned out to be a good day for the eurozone, the best we've seen in a long time.
A coordinated display of firepower from the world's largest central banks has pushed up the value of the euro in the foreign exchange markets, and European bank shares have surged.
What have we learned?
First, investors were right to perceive, in the past day or so, that policymakers had grasped the urgency of the situation and were preparing to act. They just had the wrong set of policymakers.
Determined not to let Europe's banks get into the kind of funding difficulties we saw in 2008, central bankers have done what the likes of President Sarkozy and Chancellor Merkel find it so hard to do. They have acted quickly and decisively to combat a clear and present threat.
Second, we've been reminded that central banks work best when they work together and without reservation. We saw that clearly in response to the financial crisis in 2008 and we have seen it again today.
Third, we've seen, again that the ECB is willing to do a lot to support the eurozone, as long as their actions can be said to address problems of liquidity, not solvency, and the entities being supported aren't governments.
These are all good things. But today's action also carries a last - and less optimistic - message.
As the mood has darkened, in recent weeks, there have been those who have argued that the comparisons with October 2008 were overdone - that the world is a much safer place now than it was then. Well, perhaps. But if you've been sitting in a European bank, the fear and anxiety overtaking the markets has felt all too familiar.
In an eloquent speech in Washington today, the head of the IMF, Christine Lagarde, repeated her call for policymakers to act together to confront today's troubling times.
She said "they must reclaim the spirit of 2008, or the spirit of 1944. The Wilsonian spirit—the belief that the whole is greater than the sum of its parts".
Investors are right to be relieved that central banks have today reclaimed 'the spirit of 2008'. But we should not forget to be disappointed that it is still required.
13.30: Today is shaping up to be a decent day for the eurozone. Tomorrow is another matter.
The Spanish government was able to find buyers for its medium-term debt this morning, at a not-too-exorbitant rate of interest of about 5%. Investors also seem still to be buoyed by the statements coming out of yesterday's conference call between the leaders of Germany, Greece and France.
As I said on the 10 o'clock news last night, it is not clear why investors should be so thrilled by such an anodyne statement. It didn't say anything that had not been said before - indeed, the words from the French and German side didn't do much more than confirm that Greece was part of the eurozone. That much, we already knew. The question is whether it will stay there.
Apparently, investors believe that politicians are committed to resolving the short-term issues hanging over European markets, even if the long-term questions about the future shape of the eurozone remain resolved. But if so, I suspect that has more to do with the US Treasury Secretary's comments on Wednesday than anything said on that call.
In his interview for CNBC, Tim Geithner said the usual things about politicians needing to try harder to get the situation under control. But he also reminded his audience of a simple, but easily forgotten fact: Europe has plenty of money.
The way America sees it, the eurozone countries between them easily have the financial capacity to fix the problem, they just need to get their act together. As a group, they have a lower level of debt than the US, relative to their economy. And, unlike America, they are not running a current account deficit with the rest of the world: they are paying their way in the global economy.
Looked at this way, Europe's problems are all home-grown and only require a bit of political will to fix - political will and some judicious bullying of the ECB.
"All very well for him to say," you might hear European finance ministers mutter, tomorrow, when Mr Geithner tells them all this at their meeting in Poland. He doesn't have to think about how 17 governments will react to the level of European fiscal integration that America, Britain and China are all now calling for - let alone the massive injections of capital into Europe's banks. There will also, doubtless, be some muttering about the Americans' always thinking you can solve problems in the financial sector by throwing a lot of money at them.
But imagine, for a moment, that ministers decided they were going to follow his advice. They might not be able to redesign the eurozone overnight or start selling common eurobonds next week, but imagine, against the odds, that eurozone ministers decided they were going to confront the default and liquidity worries hanging over the eurozone with "overwhelming force", as Mr Geithner recommends. What, exactly, might that look like?
The answer is it would need to look very different from the approach that emerged out of the special leaders' summit in July. You'll remember, that agreement said the emergency bailout facility, the EFSF, would henceforth play the role of "European Monetary Fund", able to intervene in markets to keep borrowing costs for solvent governments under control.
As I said at the time, there was an obvious flaw to this approach: they weren't giving the EFSF any more money to do it. And even the expansion of the Fund which had already been agreed, in the spring, had not yet been ratified. It still hasn't. On the current time-table, the fairly modest expansion agreed nearly five months ago might not be formally ratified until November.
In the meantime, it turned out that the ECB had to step up to the plate, again, by purchasing Spanish and Italian bonds.
But, as Thomas Mayer and Daniel Gros identified in a recent paper for the Centre for European Policy Studies, this problem can't be solved by simply expanding the EFSF - and not just because it takes so long to do it.
"Overwhelming force", when it comes to providing liquidity support for markets, has to mean support that is potentially unlimited - open-ended. The EFSF can never play that role, in its current form, because investors know that the more countries get engulfed in crisis, the fewer will be left to back the fund, and the smaller the pot of available money will be.
The answer, say Messrs Mayer and Gros, is to turn the EFSF into a bank - or, more accurately, a special credit institution - which could then borrow from the ECB, just like other banks. On this plan, the EFSF could then be a proper European Monetary Fund, with one side managing adjustment programmes and (where necessary) orderly debt restructuring, and the other side using ECB liquidity to support confidence in solvent but troubled governments, by buying their bonds on the secondary market. This would all be in the charge of eurozone finance ministries, not the ECB.
Would this solve the eurozone crisis? No, of course it would not. It would not address the crucial issue of which governments are solvent and which are not. (Though it would provide a forum for doing that.) Nor would it get the ECB out of the business of rescuing governments - though at least it would now be doing so at one step removed.
These are not small details. But, unlike the common eurobond proposal, the authors think that turning the EFSF into a bank would at least be legal, under the current treaties governing the EU. It should also be quicker. And it would have the immense advantage of letting European ministers out some real money behind their rhetoric.