The European Central Bank (ECB) says it can treat the symptoms of the eurozone debt crisis, but not cure it.
After three months of relative calm, the European sovereign debt crisis returned to the headlines this week. Stock markets fell around the world and borrowing costs for the Spanish and Italian governments jumped as doubts grew over the countries’ ability to cut deficits and grow their national economies.
ECB executive board member Benoit Coeure says the markets remained nervous about levels of European government debt.
“The ECB has addressed the immediate symptoms, but monetary policy cannot cure the underlying causes,” Coeure says.
Spain’s government is struggling to reduce its budget deficit and crack down on overspending by regional governments.
Mohamed El-Erian, head of the world’s biggest bond investor, Pimco, told the St Louis Federal Reserve Homer Jones Memorial Lecture on central bank policy activism that people were realising the tranquillity surrounding European bond markets over the past few months had been ‘bought’ rather than earned.
“It depends on the ECB putting in liquidity in order to calm markets. At the first indication that the ECB may not be committed to this, people get really nervous,” Bloomberg reported him saying.
“There is likely to be a limit out there to how long it can, on its own, stop a liquidity problem in Italy and Spain raising concerns again about solvency.”