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The ECB May Yet Save Europe!

Hat’s off to Mario Draghi, who may actually be the smartest man in Europe.

As a result of today's ECB board meeting, I now assign a higher probability to eurozone survival than I have since the crisis began in early 2010. For the first time, the cup is half-full. Europe has finally abandoned its hopeless strategy of mutual eurobonds backed by fiscal union (piling debt upon debt), and is moving toward the only possible solution: full-scale monetary rescue by the ECB.

The entire governing council (minus one, Weidmann of the Bundesbank) voted for Draghi’s bond-buying program (“outright monetary transactions”). Under this program, the ECB will spend an “unlimited” amount of euros to buy medium term government bonds in the secondary market. To be eligible for the OMT, governments will have to apply to the EFSF/ESM and submit to a comprehensive reform plan including both micro reforms and a path to budgetary balance. (This is a big mistake.)

But before I discuss the plan’s drawbacks, let me explain its good parts. First of all, this action embodies my fondest hope, which was that the ECB would finally ignore Weidmann and get on with rescuing the eurozone. Poor Mr. Draghi was forced to cook up an elaborate rationale explaining why buying peripheral bonds is in keeping with the ECB’s charter, which explicitly forbids exactly it. He knows that his rationale is completely bogus but he needs it to help the Northern governments sell it to their people. (Note that both the Finnish and Dutch central banks went along with the plan, which may not please their governments, especially Finland. We haven’t heard from any governments yet.)