There is an old saying among central bankers that credibility is earned in years of hard work, but can be lost overnight. On Sunday night, the European Central Bank may have said goodbye to its credibility when it agreed to buy the government bonds of euro nations in trouble.
The life-support system for Greece, Ireland, Portugal and Spain is now under threat. The highly indebted nations of the euro area can’t survive the deficit crisis without access to central-bank credit.
Daniel Gros, director of the Centre for European Policy Studies in Brussels, said a return to the deutsche mark would caused Germany’s financial and banking system to “collapse completely,” Welt am Sonntag reported.
Over the course of 2012, the U.S. economy rebounded with all the vitality of a slug waking from a long nap. In debt-strapped, recession-hit Europe, investors fret about a Spanish bailout, a Greek default and whether the euro itself will shatter.
German Chancellor Angela Merkel and French President Nicolas Sarkozy suffered setbacks in state and local elections that risk undermining the remainder of their terms leading Europe’s two largest economies.