Zakaria: The savior of Europe
The European Central Bank's new chief Mario Draghi gives his first press conference at the ECB in Frankfurt, Germany, on November 3, 2011. (Getty Images)
February 23rd, 2012
11:47 AM ET

Zakaria: The savior of Europe

By Fareed Zakaria

Europe has been rescued. No, I’m not talking about the deal over Greek debt that was much in the news recently. The real rescue of Europe is being managed quietly, away from the headlines, by a low-key Italian, Mario Draghi, the new head of the European Central Bank (ECB). Over the past two months, Draghi has put the ECB to work, and the results show the power of central banks and the importance of using it effectively.

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.

Read on here at TIME Magazine.

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Topics: Economy • Europe • From Fareed • Time Magazine

soundoff (26 Responses)
  1. m v r prasad

    i know little economics. However, i have a hunch Bernanke and Obama have saved the US economy from a deep recession. That is what Draghi seems to be doing now for Europe. We can be quite ungrateful for our saviours.

    February 23, 2012 at 12:33 pm | Reply
    • j. von hettlingen

      I'm not so sure whether it's a good idea to print money. No dobut there's no immediate risk for an inflation right now. Time will tell if this instant and short-sighted action will help boost and sustain growth in the long term.

      February 23, 2012 at 5:39 pm | Reply
      • Alexander Langer

        Read Paul Krugman on the concept of the liquidity trap. Essentially, no matter how much money is printed, inflation will not spike massively, which lets the government run both expansionary fiscal and monetary policy at the same time. Hopefully, we can force out politicians to bring spending down to Earth once the recession is over, but until then let spending rip!

        February 23, 2012 at 10:41 pm |
      • John Obrien, phD

        DO NOT listen to him. I personally published an objective proof of the fallacy behind the liquidity trap. http://www.lvmglobalmarkets.com/what-you-are-missing-myth-surrounding-the-financial-market-the-objective-fallacy-of-the-liquidity-trap

        In regards to printing money; It benefits the ONLY the people who receive the money first; the rest of society faces higher prices (Gasoline, food, raw materials are always the first price to rise).

        March 19, 2012 at 11:51 pm |
      • John Obrien, phD

        DO NOT listen to him. I personally published an objective proof of the fallacy behind the liquidity trap. http://www.lvmglobalmarkets.com/what-you-are-missing-myth-surrounding-the-financial-market-the-objective-fallacy-of-the-liquidity-trap

        In regards to printing money; It benefits the ONLY the people who receive the money first; the rest of society faces higher prices (Gasoline, food, raw materials are always the first price to rise). They are looking to save their own banks. Fareed Zakaria needs to stop doing damage by speaking on subjects in which he has not specialized knowledge. It is highly misleading.

        March 19, 2012 at 11:53 pm |
  2. Ahmed

    Very good article !

    February 23, 2012 at 12:36 pm | Reply
  3. jal

    ?

    February 23, 2012 at 12:41 pm | Reply
    • jal

      ??

      February 23, 2012 at 2:06 pm | Reply
      • jal

        So no bubble to burst then Fareed?

        February 23, 2012 at 2:21 pm |
  4. Marine5484

    And just who bailed out the E.C.B? They didn't exactly get that money out of thin air! I only wish that Fareed Zakaria would drop this fairy tale over the Europeans saving themselves. The Chinese bailed out the European Central Bank and that's all there is to it!

    February 23, 2012 at 1:48 pm | Reply
    • Herb

      thin air? well no, taking into account that printing the money, is quite tricky on an automized level and also costs somthing to print – have it distributed to the system, (regional Banks, companies etc. for liquidity ) it is actually an investment made by the ECB or the FED in America / Europe towards their respective monetary systems and their people. so if we assume pumping cash into a monetary system is in itsself an investment and to make this investment in a codependant global market, Europe or America doesn't actually owe China or any other country anything directly. The people receiving the money actually owe the ECB or the FED something. And i believe that to be interest. The ECB is "BANKING" on the system stabalizing itsself and becoming healthy and powerful enough to compete for international import/export power of goods and currency... if i'm wrong plz correct or add something, but please internet don't be mad bro and dont troll. ty

      February 23, 2012 at 3:18 pm | Reply
      • George Patton

        Herb, just who do you think is financing our tremendous budget deficit? Our I.R.S. is only generating 61% of what our government current spends, so where do you think the other 39% comes from? Much of it from China. In fact, that country whose name starts with a J is contributing more!!! Enough of this bla-bla-bla about both the U.S. and Europe "helping themselves"!!!

        February 23, 2012 at 3:26 pm |
  5. alzaripov

    The world's crisis of all kind have, by now means, the regularity and the man can never establish the true cause of them. Stability is only temporal felisity and chaos is standing destiny of humankind.

    February 23, 2012 at 3:05 pm | Reply
  6. Zach Abbott

    While I agree with anyone who says inflation is a worry I don't see it as a critical flaw in the system Draghi is undertaking. European banks now have much more liquid capital to work with (cover loans and deposits, as well as loan more money out ideally). Here in America what the Fed did actually saved our economy and much of the money injected into the banks was repaid with interest. I agre with j. Von hettlingen that only time will tell. However for the time being things are looking up.

    February 23, 2012 at 9:04 pm | Reply
  7. matt a.

    We're being talked in to growth spurt that isn't there. Smoke and mirrors . . .mirages, just like the $15 trillion deficit.
    Congress won't cut, so the Fed is left to unjustified money printing–if only the former has been unable to implement tax reform.

    Their are those on the left thast claim to have statistical evidence that a flat tax won't spur growth and will result in higher deficits.

    Others propose higher government spending ( read, money printing) to sustain growth.

    Look where the latter has taken us over the decades. Pick your poison, but when the collapse hits, the intellectuals may reasses their positions. Assuming we want to avoid the apocalypse, now might be the time for decisive action, post haste.

    Draghi and Bernanke are just printing Monopoly money.

    February 24, 2012 at 12:14 am | Reply
  8. S.V.P.YADAV

    Respected Mr.Fareed Zakaria Garu If done the Job secretly, Automatically he is a Savior for Uerope.

    February 24, 2012 at 1:10 am | Reply
  9. marc gunn

    Perhaps it was the right thing to do, but the lack of integrity is astonishing as it was explicitly stated by the ECB they would NOT do this and it isn't in their mandate. Like the USA this amounts to a massive mother of all subsidies (as subsidies are really based on financing and these enable them and us to maintain for now our ability to finance lower than anyone else) making our criticism of any one else subsidy throughout the world total hypocrisy.

    February 24, 2012 at 4:39 am | Reply
  10. WHY

    we must stop this evil before it is too late, remember HITLER......
    those shiia thugs have no value for life...they are killers with stupid thyology of islam the shiia are cult and
    they breed evil, now they are killing there own people in syria UN MUST ACT, THEY ACTED ON LIBYA IN NO TIME AND THEY DID IT IN IRAQ , WHILE IN LIBYA AND IRAQ IT WAS ONLY FEW HUNDEREDS WERE KILLED NOW WE HAVE MORE THAN 12,000 CEVILIANS KILLED AND MURDERED BY BASHAR AL KALB IN SYRIA BY IRAN MONEY AND RUSSIAN ARMS, we must sanction russia and get red of all the embassies and cut any deals with them.
    arm the resistant to fight russians on there land,and fight iran and syrians thugs we must not stand silenet when we see evil at action.

    February 24, 2012 at 9:34 am | Reply
    • HermantheGerman

      Remember Hitler or Henry Kissinger

      February 24, 2012 at 9:53 am | Reply
  11. Debbie

    Well Fareed,
    Why don't you really investigate the bankers? You seemed to wash right over the printing of all that money and how their false power lets them get away with stealing from the world. Will you ever have the courage to do that?

    February 24, 2012 at 9:53 am | Reply
  12. Tomas

    [..YouTube..] CAPITALISM creates ELITE CRIMINALS. BANKERS. DRUG LORDS. INEQUALITY. INSECURITY. GREED. RUTHLESS COMMUNISM. NWO. NAZI. TERRORISM. LAZY PEOPLE. REBEL POLITICIAN. ANARCHY. worst is WAR etc.. etc..CAPITALISM was edsigned only for CORRUPT OPPORTUNISTIC MANIPULATIVE LAZY POLITICIAN. BANKERS. LAWYERS. DRUG LORDS. JUDGES. CRIMINALS. DICTATORS. RULERS. KING. SULTANATE. EMPEROR etc. etc..HARD WORKING PEACE LOVING HAPPY HONEST SOCIETY were always the slave victim and poorly starve to death. 8 December 2011, 22:16

    March 14, 2012 at 1:37 am | Reply
  13. vahanhun

    Reblogged this on Վահան Հունանյանի բլոգը.

    April 22, 2012 at 4:29 am | Reply

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