Chronic Europe

LONDON – Europe’s great success in 2012 was to avoid becoming another of history’s failed monetary unions. European Central Bank President Mario Draghi’s actions prevented a market meltdown and bought European leaders time to deliver on political and institutional reform. But have political leaders again chosen to muddle through, rather than meld a resilient strategy?

To be sure, few envisioned the degree of compromise and integration that was achieved during the acute phase of Europe’s financial crisis. Control mechanisms that theoretically infringe on sovereignty are now in place for national budgets and, soon, for the 150 or so largest European banks. Creation of the European Financial Stability Facility and its successor, the European Stability Mechanism (ESM), provide an important financial backstop for smaller countries that are destabilized by external shocks.

But the real game changer has been the ECB’s creativity in designing ways to prevent the sudden insolvency of banks and governments. While it might take military expertise to learn all of the acronyms created in the last three years, the LTRO (long-term refinancing operation) and OMT (outright monetary transactions) will be remembered as the ECB’s twin bazookas.

Nonetheless, while bazookas may win battles, they do not win wars. This is particularly true in finance, because markets, politicians, and citizens adapt to changing circumstances. The success of 2012 was to end the acute phase of the crisis; but its chronic features persist.