The ECB Cannot Cure Causes Of Eurozone Crisis

by: William Larson

The European Central Bank (ECB) is digging in its heels by refusing to provide additional funding to at-risk eurozone governments unable to rein in deficits. The ECB wants member governments to deal with the root causes of financial crisis and get their financial houses in order. The tougher stance is prompted by change of attitude of a growing number of eurozone governments that initially agreed to implement austerity measures, but that now claim these measures are preventing growth.

The ECB contends that government backtracking on agreements involving fiscal austerity demonstrates a lack of commitment to resolve the crisis permanently. And, while the ECB will not cease its anti-crisis interventions, it clearly wants eurozone governments to understand that it is not a panacea for the long-term debt crisis.

Speaking on behalf of the ECB, executive board member, Benoit Coeure said recently, "The ECB has addressed the immediate symptoms, but monetary policy cannot cure the underlying causes." This same tough stance has been underscored recently by ECB President Mario Draghi who contends that by providing liquidity to banks and cutting interest rates to record lows, the ECB has done enough.

The EU Under Pressure

Meanwhile, political unrest in Greece, Italy and Spain continues. Massive protests in each of these member nations call into question the future of the future of the single currency union.

The sovereign debt crisis among eurozone countries today prompted British Prime Minister David Cameron to express concern about the future of the European Union.

In a BBC interview today, Prime Minister Cameron said that the eurozone debt crisis was partially responsible for Britain's fall into recession, and added:

What's happening in the eurozone is a massive tension . . . that countries are finding very difficult to adapt to, and that's what we're seeing . . . I think it's going to be a very long and painful process in the eurozone as they work out whether they want a single currency with a single economic policy . . . or are they going to have something quite different.

The Bottom Line

Will the ECB soften its stance with regard to the present crisis situations in Spain and Italy? Most likely it will. ECB President Mario Draghi last week suggested that perhaps a "growth compact" that would complement the "fiscal compact" should be implemented with member nations.

The ECB has demonstrated in the past that, in times of severe crisis, when market panic is taking place, it has the ability to step in and temporarily resolve a situation. The ECB can take what it calls "non-standard" measures to prevent the collapse of the euro, even if it means printing more money to do so. But even with the ability to halt market panic, the ECB cannot permanently resolve the fiscal problems of the debt laden eurozone without the cooperation of member nations. Fiscal responsibility is the only sure road to a permanent solution.

But getting there is the problem. And until a permanent solution is in place we need to brace ourselves for considerable volatility.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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