Where will the European Central Bank go from here?

Updated

“Draghi: Yields disrupting policy transmission are in ECB remit.” Huh?

According to Ezra Klein, guest host of Thursday’s The Rachel Maddow Show, that was the most important sentence in the day’s news.

This one sentence—received by financial institutions around the world—has huge implications for the future of European debt crisis. But it’s also, at least to the layman, completely incomprehensible. Fortunately, Ezra was on hand to explain what it means.

First off, the proper nouns: the ECB in that sentence is the European Central Bank, essentially the European Union’s equivalent to the Federal Reserve. “Draghi” means Mario Draghi, the president of the European Central Bank. So Draghi, head of the ECB, was saying that “yields disrupting policy transmission” are in his bank’s “remit.” And, as Ezra says, that’s huge.

Ezra started by laying out the basics of the European debt crisis, an issue he has explained on air before. “The simplest way to understand the euro crisis is that Greece, and Spain, and Italy, and Portugal, and Ireland are having trouble borrowing money,” he said. “If they can’t borrow money, they collapse. If they collapse, the eurozone collapses. If the eurozone goes down, the world economy is going to get hurt very badly.”

The eurozone is the network of European Union member states who use the euro as their official currency. Because those countries use an international currency, none of them have a national central bank with the ability to print more of that money. The only bank with the power to print more euros is the European Central Bank.

“Mario Draghi and the European Central Bank, however, could solve the problem. You see, they can print money,” Ezra went on. “They can print as much of it as they want, and then they can lend it to the struggling countries. … But they’ve been saying this is against the rules for them, that they can’t lend money like that; and that even if they could, they wouldn’t, because inflation is scary.”

The European Central Bank has a mandate to keep euro inflation below 2 percent, and that is one of the reasons Draghi and other ECB officials have given for not printing more money. (Though there are, perhaps, other reasons.) However, when Draghi says that “yields disrupting policy transmission are in ECB remit,” he seems to be suggesting that the bank has other problems it needs to deal with if it hopes to preserve the euro at all.

The “yields” Draghi refers to are bond yields in those countries that can’t borrow money: essentially, how much it would cost those countries to borrow more. Draghi, writes the Washington Post’s Brad Plumer, “seems to be suggesting that the high borrowing costs for Spain and Italy are actually hindering the ECB’s ability to stabilize the continent’s economy. And if that’s the case, then maybe the central bank has the authority to do something about Spain and Italy’s high borrowing costs after all.”

It remains to be seen how far the ECB is willing to go, and how successful it will be. But Draghi has at least made it clear that he doesn’t see the breakup of the eurozone as an option. For now, at least, that seems to have assuaged some investors’ fears.

Ezra Klein

Where will the European Central Bank go from here?

Updated