PARIS – A year ago the eurozone was in serious trouble. A series of policy actions – the creation of a rescue fund, a fiscal treaty, and the provision of cheap liquidity to the banking system – had failed to impress financial markets for long. The crisis had moved from the monetary union’s periphery to its core. Southern Europe was experiencing a sell-off of sovereign debt and a massive withdrawal of private capital. Europe was fragmenting financially. Speculation about a possible breakup was widespread.
Then came two major initiatives. In June 2012, eurozone leaders announced their intention to establish a European banking union. The euro, they said, had to be buttressed by transferring banking supervision to a European authority.
For the first time since the onset of the crisis in Greece, it was officially recognized that the root of the eurozone’s problem was not the flouting of fiscal rules, and that the very principles underlying the monetary union had to be revisited. The endeavor was bound to be ambitious. In the eyes of most observers, to reach the leaders’ goal of “break[ing] the vicious circle between banks and sovereigns” required centralizing authority for bank resolution and rescue.
The second initiative came a month later. Speaking on July 26, European Central Bank President Mario Draghi announced that the ECB was ready to do “whatever it takes” to preserve the euro: “Believe me,” he said, “it will be enough.” The meaning of these words became clear with the subsequent announcement of the ECB’s “outright monetary transactions” (OMT) scheme, under which it would purchase short-term government bonds issued by countries benefiting from the European rescue fund’s conditional support.