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Mario Draghi, president of the European Central Bank, faced a heavy burden yesterday. As he prepared to present his latest Eurozone plans, many expected a miracle. The previous week, he had made a bold promise: ‘the ECB is ready to do whatever it takes to preserve the Euro. And believe me, it will be enough.’
The single currency is in dire need of a saviour. One big problem is to do with the ‘yield’ – or interest – that governments need to pay on fixed-period loans called ‘bonds’.
These ‘bond yields’ reflect the health of a country’s economy – and in Italy and Spain, they are dangerously high. At times, they have capped 7%, making it hard for either country to borrow money. When the yields of Greece and Portugal hit that point, they had to be bailed out by richer nations.
When Draghi promised to ‘do whatever it takes’ to save the Euro, many thought he had something similar in mind. Pundits expected the ECB to buy bonds from Italy and Spain. That would lower their borrowing costs and help them get on their feet. The world anticipated Draghi’s speech in hope.
So did Super Mario come to the rescue? Sadly, it seems, the answer is no.
In his announcement, Draghi implied the ECB might buy bonds – but in weeks, not days. His words were hopeful, but there was no clear plan of action. Other rescue possibilities were barely mentioned.
In response, stock markets plummeted – and Spain and Italy’s all-important bond yields shot up again.
What happened? The Central Bank of Germany, it seems, refused to buy Spain and Italy’s bonds. As a rich nation, it has taken some big hits to save its poorer neighbours – and now, it doesn’t want to give them a second chance.
Some say this problem exposes a fatal flaw of the Eurozone. Though its 17 nations share a currency, each has a totally different economy. Last week, Draghi illustrated that with a curious simile. The Euro, he said, is like a bumblebee. Though it shouldn’t be able to fly, it has somehow managed to, for years. Now, however, it is not flying well. It is time to ‘graduate to a real bee’ – a unified currency, where every nation has a healthy economy.
If today’s dithering is anything to go by, some say, that is a long way off. Many are furious at Draghi’s lack of decisiveness. The Eurozone, they say, is spiralling further into disaster, and action is urgently needed. Now is not the time for words.
But balancing the conflicting needs of the whole of Europe, others point out, is a tricky and delicate job. To save the Eurozone, consensus is needed. That means gradual, careful moves, and absolute commitment that the Euro will stay. Draghi may be making small steps, but they are in the right direction.
1. Should the Eurozone crisis be handled with urgency – or more gradually and cautiously?
2. Do the Eurozone’s richer economies have a responsibility to help out their poorer nations?
1. Imagine you are Mario Draghi, and have to explain to a waiting crowd of excited journalists that you do not have a real solution to the Eurozone’s problems. Present your speech to the class.
2. The Eurozone has been compared – at various points – to a single nation, a bumblebee, and even a café. Come up with your own metaphor for the ailing currency.
Some solid pre-speech analysis from the BBC’s Robert Peston.
The Guardian’s live blog of Eurozone action – the summaries and graphs are especially useful.
Last week’s speech from Mario Draghi – including an explanation of the bumblebee simile.
One disappointed reaction to Draghi’s speech.
A neat analysis of Draghi’s ‘mixed messages’ on the Eurozone crisis.
Q: Is this an issue globally, or just in Europe?
A: If the Euro fails, it will affect the whole world. The global economy is interconnected, and countries rely on each other for trade. When one region runs into trouble, it affects all the others – and because the Eurozone is the biggest unified economic region, problems there could have a very big impact indeed.
Q: In what way?
A: Doubt about the Eurozone, for example, could be hampering the US economy – which in turn affects the optimism of American voters. That will influence the upcoming presidential election – and if the economy doesn’t look healthy, current leader Barack Obama is less likely to win. He has urged Europe’s leaders to act decisively in response to the crisis – but so far, the results have done little to allay his fears.
Bumblebee – According to a folklore, bumblebees should be incapable of flight. Although the origin of the myth is difficult to pin down, it is thought to stem from the mistaken calculation that the wing and body size of bumblebees would make it impossible for them to stay in the air. Modern biology, however, has shown bees can actually move a very large amount of air with each wing beat, and as a result have no difficulty flying.
European Central Bank – Mario Draghi is the head of the European Central Bank, which administers and sets monetary policy for all the nations that have adopted the Euro. It has the responsibility for maintaining monetary stability across the Eurozone – which so far has involved buying bonds and ‘bailing out’ nations.
Bond yields – Borrowing money is essential for governments. Usually, bonds are taken out for set periods of time – often ten years – with a yield, or interest, paid back annually. A healthy bond yield will usually sit at around 2%. The ailing nations of the Eurozone are paying bond yields of around 6 or 7%.
‘The Euro was never going to work.’
What do you think?
Business and Economics