When Barack Obama celebrates his second inauguration next January, the man who did most to ensure his election victory is not likely to be there. But perhaps the president should make a note to reserve a seat for the head of the European Central Bank.
With no convention bounce and little prospect of a convincing win in presidential debates, challenger Mitt Romney’s hopes have been centered on an October surprise. Under the current circumstances, that means an economic shock sufficient to discredit Obama’s promise of a slow but steady recovery from the economic crisis. Until last week, that shock seemed likely to come from Europe. The possibility of a Greek exit from the euro, seemingly off the agenda a few months ago, had reemerged as a major factor in the investment plans of U.S. companies.
More importantly, the German constitutional court ruled this week that German taxpayers could not be made to contribute to the European Stability Mechanism (ESM), the fund that has so far bailed out euro-zone governments hit by the debt crisis. While it upheld the legality of the ESM, the court did so with some significant limits.
A Greek exit or, worse, a collapse of the European Stability Mechanism would have been a disaster for the EU and the world economy. The resulting financial shock would have been as bad as that of 2008, this time flowing from Europe to the United States rather than the other way around.
On the other hand, such a crisis would have been hugely beneficial to Romney’s electoral chances. Not only would the financial crisis raise echoes of the 2008 bailout (for which many voters now blame President Obama, though he took office in 2009), but the Republicans could tie Obama to the failure of the European model.
Until recently, such an outcome seemed as likely as not. The only way to avoid disaster, a policy of purchasing government bonds along the lines of the Fed’s system of “quantitative easing,” seemed to be off the agenda. Although it had backed away from the position that such a policy was illegal under its constitution, the ECB showed little sign that it had the stomach for decisive action. Ever since the emergence of the crisis, the ECB has put forward half measures, with two steps forward and one step back, relying on the austerity policies imposed on national governments to resolve the crisis.
Last year’s departure of chairman Jean-Claude Trichet removed one obstacle to decisive action. Trichet, who actually raised interest rates at the height of the crisis, was absolutely committed to the failed policies of the past. But the German Bundesbank appeared equally resolute, to the point that its ECB representative, president Jens Weidmann, leaked threats to resign if any large-scale bond-purchase program were undertaken.
In these circumstances, another half-hearted compromise seemed inevitable. Limited support for bond markets might have staved off a crisis but equally might have been overwhelmed by a shock such as an enforced Greek exit.
Last week, however, new ECB president Mario Draghi finally bit the bullet. Announcing that “the euro is irreversible,” Draghi committed the ECB to unlimited purchases of government bonds. Weidmann, the sole dissenter on the ECB board, has so far not carried out his threat to resign.
The ECB decision marks an effective end to the euro-zone sovereign-debt crisis, though not to the European depression or to the failed policies of austerity. At best, the euro zone is now in the same position as the United States and Britain: there is the prospect of a sluggish recovery but no immediate danger of collapse. A true recovery will require both a shift in central banking policy from targeting inflation to targeting nominal GDP, which looks a bit likelier now, and a shift from austerity to fiscal stimulus, which does not.
As far as Mitt Romney’s electoral prospects are concerned, the prospect of a fortuitous European economic crisis discrediting Obama is now off the table. Of course, no election is over until the votes are counted. Something else might turn up. But if Barack Obama is reelected, he will owe his victory, in no small measure, to the ECB’s Mario Draghi.
John Quiggin is a professor of economics at the University of Queensland, Australia and adjunct professor at the University of Maryland, College Park. He is author of Zombie Economics: How Dead Ideas Still Walk Among Us (Princeton University Press, 2010).