Eurocrisis: A Big Bazooka For Markets, Maybe
The worst is yet to come, says a report Issued on Friday by the International Monetary Fund. A “big shock” in the region could lower output in the euro zone by 5 percent, by almost as much in the UK, by 2 percent in the US and by 1 percent in Japan. The causes of such a shock noted by the IMF are all too familiar: “a jump in sovereign and private bond yields across the eurozone, a drop in consumer demand, and shifting asset prices.”
Or maybe not.
On Thursday, European Central Bank (ECB) president Mario Draghi made a much-anticipated announcement about measures to “save the euro.” The ECB has offered “to buy Italy’s and Spain’s bonds on the market as long as the euro governments’ bailout fund makes purchases directly from the two countries’ treasuries and ties them to tough conditions.”
That is, this plan will take the ECB “further away from its roots as a politically autonomous central bank, modelled on Germany’s Bundesbank, with prime responsibility for containing inflation and only a lesser focus on the broader economy and the stability of the banking system.”
While initial reactions were muted, one analyst commented on Friday in Bloomberg that “if transferred into actual activity,” theae measures “would be close to the big bazooka approach that the markets are looking for,”
This will not start until September 12, when Germany’s Supreme Court rules on the constitutionality of using funds from the planned 500 billion- euro permanent rescue fund, the European Stability Mechanism, for bailouts.
The measures do not give immediate short-term relief such as Spain is seeking. But they do make steps towards the goal of greater fiscal unity in the euro zone mentioned at a summit earlier this summer.
The Guardian points out that the actual figure for the employment rate in the US is 8.254 percent, which rounds up to the more alarming 8.3 percent that took the bloom off the addition of 163,000 jobs in July.
Job creation is still weak but the US economy seems to be slogging on and avoiding fialling into a recession. Markets seemed cheered with the Dow posting its longest rally on Friday since October. Will Draghi’s bazooka be the hoped-for “shot in the arm” to weary markets or a bubble that bursts?
Previous Care2 Coverage
Photo by blmurch