Brad Plumer did an excellent post earlier this week calling bullshit on ECB claims that it would be illegal for them to step up to the plate and provide relief in the European debt crisis. In a speech delivered early this morning in Frankfurt, ECB Chief Mario Draghi took another stab at explaining himself. His view is that if the ECB stepped in to offer relief, that might undermine its credibility as an inflation-fighter over the long term. “Losing credibility can happen quickly,” he warned, “and history shows that regaining it has huge economic and social costs.”
I’m running out of analogies to explain how frustrating I find this logic. So let’s just be frank. What is it that Draghi thinks is happening now? Is Ireland enjoying a walk in the park? Have the past 12 months been party time for Greece and Spain and Portugal? Another year of this kind of suffering is baked into the cake for those four countries. If Italy tips into a Spain-esque depression, wouldn’t that have huge economic and social costs? Aren’t there costs to prolonging the Spanish depression? Or think about plucky little Ireland and Estonia, winning praise from bureaucrats everywhere for their imposition of internal devaluation, aren’t they going to smacked with a sledgehammer if things go to shit? And what about France?
Now I don’t want to be alarmist, but let’s talk a bit about credibility. Suppose there’s a prolonged, continent-wide depression. Suppose the European Union and its institutions lose all credibility as a force for human welfare. Suppose the mainstream political parties in every European country lose all credibility as vehicles for popular aspiration. How does that story end? Don’t we already know? Didn’t we build these institutions for a reason? I think they were built for a reason. A reason that had something to do with huge economic and social costs. But it wasn’t fear of the Harmonized Index of Consumer Prices increasing at a four percent annual rate.