The European Central Bank’s plan to make nearly unlimited purchases of the sovereign paper of Europe’s weakest nations was to be the financial salvation of Europe. The bond purchases would drive down borrowing costs, which would help weak nations to raise money in the capital markets at rates they could afford. But the nations that were thought to need the facility most have rejected it. The program could end up with nearly no activity at all. Perhaps borrowing creates too much of a stigma.

Several media outlets have reported recently that Spain and Italy will not use the ECB bond program. They seem to want to wait to see if Europe’s new bailout facility can help them with less control of their budgets from outside. The irony is that use of the European Union’s permanent fund will require strict budget controls and some manner of oversight anyway. Why not borrow the money from the European Central Bank now and present austerity plans that could be accepted because they involve less direct aid for other nations in the region? The heavy hand of Germany, in particular, might be partially avoided.

The decision to defer or eliminate use of the ECB facility has no advantage in terms of the loss of independent budget control for weak nations like Italy and Spain. It is too early to know whether EU funds will come with stricter conditions that those from the ECB. All that can be said for certain is that Germany’s role cannot be eliminated under either circumstance.

The rules of engagement for ECB or EU aid have not be set entirely, nor will they be until the first bailout is created as a precedent. And no precedent may be available if each nation is viewed as having unique problems that require unique restrictions.

The decisions by Italy and Spain to avoid the ECB program because it carries too many strings may end up as a strategic blunder. Any bailout will come with harsh conditions. Better to take the money now when it is really needed than to wait until the money is needed even more and the terms to received it therefore become more onerous.

Douglas A. McIntyre

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