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European Bond-Buying Plan May Not End Debt Crisis


This move by the European Central Bank is complicated stuff, and we've asked economist Kenneth Rogoff to help explain it a bit further. He's professor of economics at Harvard and former chief economist at the International Monetary Fund.

Welcome back to the program.


SIEGEL: And the first question: In general, is this another incremental, stopgap measure to hold the eurozone together? Or is the European Central Bank and Mario Draghi, are they announcing a game-changer here?

ROGOFF: Oh, this is a big one, Robert. There's no question about it. The European Central Bank is the one pan-European institution that has the power to do unlimited check-writing. And if they say that they're going to help back the Italian and Spanish governments, it's a big deal.

But I wouldn't quite say it's a complete end to the euro crisis because at the end of the day, those governments still have to be able to pay their debts or someone will have to bail out the European Central Bank.

SIEGEL: Well, if the European Central Bank buys up high-interest bonds that reflect the high borrowing costs of Spain and Italy, costs which were caused by those countries' shaky finances, who would actually end up paying the difference? Who would pay the cost of unburdening Spain and Italy of those high interest rates?

ROGOFF: Part of the cost just goes into thin air, because if people gain confidence that the euro's going to stay together - Spain and Italy won't be forced out, that they won't default - they won't demand the same premia, and the whole eurozone governments will save money. We could see Germany's borrowing costs creep up. Germany has been getting very low interest rates, and maybe people say, hmm, who's going to end up paying for Spain and Italy? It's going to be Germany. Nobody really knows, and it's a key gamble by Mario Draghi that mostly this is a win-win, and not just Germany transferring money to the impecuniary southern countries.

SIEGEL: What about this question that Jim Zarroli raised, which is: What exactly is the role of the European Central Bank? Because unlike the Fed, it doesn't have a mission to keep unemployment low, for example, which our central bank has. Is it really up to the task in terms of what it's chartered to do?

ROGOFF: Well, they're allowed to do lots of things in the name of maintaining financial stability, because if financial stability blows up, then you'll get price instability, maybe deflation, prices going down, maybe inflation, prices going up. And I think Mario Draghi's appealing to that. He said, look, if something comes to destabilize the situation, you're not going to get stable prices. So we've got to get it under control.

Yes, it involves radical measures, but there's no other choice. It's a bit of legalese. The real game here has been that the Germans - Chancellor Merkel in particular - has sort of said, go ahead, I don't see another way to do this. Yes, the Bundesbank, the German Central Bank has been protesting, but they must have the support of the Germans to do this, because if Germany didn't support it, they could threaten to pull out and then the whole thing would melt down.

SIEGEL: Draghi and the European Central Bank here are addressing the problems of the debtors, I guess. But does there come a point sometime in the coming months when the creditors of these countries take a hit and say, look, in order for Europe to continue and for you to continue to prosper doing business in the continent, you'll have to mark down some loans for these people.

ROGOFF: Well, I think everyone outside of Europe would like to see that. They'd like to say, look, you can't just tell the people in Spain and Italy, Ireland that they have to be in recession forever, that they keep having to tighten their belts. We have seen years of recessions in these countries, the forecast for more years of recession. And at some point, that has to come to an end.

And you're absolutely right. The way would be to just write down the debts. But politically, it's very difficult - particularly for the Germans - to admit that. So they play this game of, well, you know, here's more money. Maybe you'll pay me. When we finally get to an endgame to this, we'll really see some write-downs, some forgiveness. We're nowhere near that yet.

SIEGEL: Ken Rogoff, thank you very much for talking with us once again.

ROGOFF: My pleasure.

SIEGEL: That's economist Kenneth Rogoff of Harvard University. Transcript provided by NPR, Copyright NPR.