The EU reacts to market turbulence

The European summit meeting called with the intention of reinforcing the euro against the turbulence of the financial markets began on Thursday in Brussels with signs of positive reaction, after long weeks of doubt and bitter controversy. Some of the messages heard have also been novel, and not included in the agenda of the meeting.

Such is the case of the decision by the European Central Bank (ECB) to almost double its capital (from 5.760 billion euros to 10.760 billion euros), a decision unprecedented in the 12 years of monetary union, embracing the principle that any orthodoxy with pretensions to credibility must begin at home. If the Basel III accord demands that private banks be equipped with greater amounts of capital to arm themselves against future crises, it is good that the issuing bank has set an example.

The enlargement, it is explained, will forestall "credit risks" and establish an "adequate capital base." That is, it will strengthen the bank's capacity to generate liquidity, so indispensable to ease the impact the crisis is having on the real economy.

The ECB has been the most effective instrument in the struggle against the turbulence in the debt markets which, since the beginning of the year, has threatened the stability of the euro, and the future of the European Union itself. It has done this by means of the widespread availability of direct liquidity to the banks, and through somewhat timid direct purchases of sovereign debt in the secondary markets.

This judicious deployment has so far prevented the Great Recession from dragging Europeans down into a Great Depression. And it has all the more merit in that it has been managed by the ECB's president, Jean-Claude Trichet, without the benefit of unanimity, and under pressure from the fundamentalists of extreme orthodoxy.

The latter have refused to endorse any rescue operation; have aired their opposition to the decision to increase liquidity and to extend the purchase of bonds in clear disloyalty to their commitment to maintaining a single voice; and have preached a restrictive, that is, a false version of the duties of the ECB itself. Indeed, while the bank's primary task is to watch and control any upturn in inflation, the pertinent part of the Treaty (article 127) also obliges it to "support the general policies of the Union."

On Thursday, the EU's 27 member countries underlined their agreement in principle on the mini-reform of the Treaty to make room within it for a permanent rescue fund for countries in dire financial difficulties. Agreement was reached on a text that is thankfully concise and clear, but which may not, perhaps, avoid the serious difficulties inherent in any reform of the European Union's basic Treaty text.

The personal success attained by Chancellor Angela Merkel on this point may encourage her to pay more attention to proposals for equipping monetary union with additional instruments of self-defense against challenges from the markets: ranging from greater flexibility in the use of the rescue fund itself, to a prudent issuing of eurobonds.