Zakaria: The savior of Europe

Don’t start cheering yet. I’m not suggesting that Europe has solved its problems. Despite the recent deal, Greece will not be able to pay back its loans and will face another restructuring, which is a fancy word for default. Portugal might face a similar fate. But now such defaults will not trigger a systemwide panic. There will be no Lehman Brothers–type financial collapse in Europe.

Why? There is a famous scene in the movie It’s a Wonderful Life: after the Crash of 1929, people run to the bank to pull their money out, and the Bailey Building & Loan just doesn’t have enough cash. Thanks to Draghi, Europe’s banks will have access to plenty of cash.

On Dec. 21, the ECB offered to lend Europe’s banks as much money as they wanted for three years at the astonishingly low interest rate of 1%. “In effect, he printed about $600 billion in a day and changed the game,” Sebastian Mallaby, a scholar at the Council on Foreign Relations, says of Draghi. Then Draghi suggested that he might do it again, possibly at a larger scale. “To put this in perspective, Europe and the IMF labored for almost a year to put together a rescue fund of about $500 billion. Draghi may end up creating one three times the size in two months,” says Mallaby. And he could do more. There is no theoretical limit to a central bank’s balance sheet.

The market has noticed. European stocks had their best January in nearly 15 years. Bank shares are up 20%. The rates at which governments borrow money have fallen. Investor sentiment is more bullish than it has been in months. Draghi has not fixed Europe’s longer-term problems of high debts and low competitiveness. But he has bought crucial time for Europe’s leaders to make structural changes to their countries’ economies and move toward growth. The ECB’s activism is not a new model for what a central bank can do. Here in the U.S., the Federal Reserve did the same thing—four years ago. For its actions, the Fed is under withering criticism from many on the right and left. Newt Gingrich has called Ben Bernanke the most “dangerous” chairman in the Fed’s history, Rick Perry practically accused him of treason, and even moderate Mitt Romney has criticized him and announced that he would not re appoint him when his term expires in 2014.

By Fareed Zakaria, from: http://globalpublicsquare.blogs.cnn.com/2012/02/23/zakaria-the-savior-of-europe/