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Europe's central banker has unveiled a plan to ease the euro crisis — and markets seem to believe him. He aims to stabilize Spanish and Italian finances by promising to buy bonds in unlimited quantities, but only if they agree to swallow more austerity.
BRUSSELS, Belgium — The European Central Bank on Thursday agreed on a plan to buy an unlimited amount of short-term bonds from countries struggling to raise money on the markets.
"We will have a fully effective backstop to avoid destructive scenarios," ECB President Mario Draghi told a news conference at the bank's headquarters in Frankfurt. "The euro is irreversible."
His announcement marks a turning point, especially because he succeeded in pushing the plan over very public objections by Germany's powerful central bank and the majority of German public opinion.
However, if the decision gives Europe a big bazooka to aim at the debt crisis, don't expect it to fire a silver bullet.
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Although it buys crucial breathing space for struggling euro zone economies, the plan offers no overnight solution to the debt crisis.
The market optimism it’s generated could be dashed next week when Germany's constitutional court rules on a legal challenge to a $630 billion rescue fund, another essential part of Europe's anti-crisis tool kit.
Then there’s Greece, which has gone too far down the road to economic ruin to take much hope from the ECB's plan. Athens has to persuade international creditors this month that it deserves the next slice of its bailout aid. It could face bankruptcy by October if it fails.
More broadly, European countries struggling to implement austerity packages to curtail rising debt and deficits must also somehow find a way to revive growth. No short-term rescue plan is likely to have a lasting effect unless they succeed.
New European Union data shows the euro zone slipping toward recession after the economy shrank 0.2 percent in the second quarter of this year. The ECB has downgraded its growth forecast for the year, predicting a contraction of as much as 0.6 percent and little sign of recovery in 2012, Draghi announced.
"The ECB decision must not be treated as a panacea," said European Parliament President Martin Schulz. "Its implementation must be accompanied by an active strategy for growth and jobs as well as sound fiscal policies and structural reforms."
Draghi made clear his plan would ultimately succeed only if it’s accompanied by reforms to tighten government finances and make Europe’s economy more efficient.
He insisted the ECB's bond buy-ups — to be known as Outright Monetary Transactions, or OTMs — would provide no free ride for struggling governments.
Countries applying for help will have to submit to strict conditions imposed by other euro zone countries and, probably, the International Monetary Fund to ensure they implement measures to bring down their debt, Draghi said.
That would put them on the same level as Greece, Portugal and Ireland, which had to surrender considerable control over their economic policy in return for EU and IMF bailouts.
Although Spain and Italy have been anxious to avoid such humiliation, Draghi knew he had little hope of getting opponents such as Finland and the Netherlands, let alone Germany, to accept his plan without the tough conditions.
He warned the ECB would terminate any OMTs for countries that backslide on their austerity programs.
The governments in Madrid and Rome will now be hoping the mere existence of Draghi's backstop will boost confidence enough to enable them to continue raising funds on the markets by lowering the interest rates they must pay on their bonds.
The initial signs were positive. Spanish and Italian exchanges soared as details of the plan were released. Markets around the world also rebounded on the news.
Draghi said the money the ECB spends on bond purchases would be "sterilized" — banker-speak meaning that the billions it injects into markets to buy bonds will be returned to the bank's coffers from somewhere else.
That was another move designed to allay German concerns that the bank would start driving up prices by pumping out cash indiscriminately, risking a return to the 1920s, when hyperinflation wiped out German savings.
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Despite Draghi's caution, much of Germany remains unconvinced. Bundesbank President Jens Weidmann, the only member of the ECB's governing council to vote against the plan at Thursday's meeting, maintained his criticism.
"He views such purchases as worryingly close to financing governments by printing money," said a Bundesbank spokesperson quoted by German media. "These purchases must not be allowed to jeopardize the ability of monetary policy to safeguard the stability of prices in the euro zone."
Although the European bank doesn't need unanimous backing to go ahead with its plan, Weidmann's opposition may make life difficult for Draghi, not least because the Bundesbank will have to cough up most of the cash if the ECB goes on a bond-buying spree.
Wags on the internet were quick to suggest that Germans may believe the OMT to stand for On My Tab.