The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
LONDON — Can you buck markets? Margaret Thatcher said you couldn’t; Angela Merkel, by contrast, believes in the “primacy of politics”. Who’s right depends on whether politicians have the will to change the unpleasant reality that markets can reflect. The euro crisis is testing this theory to destruction.
In one sense, Britain’s iron lady was right. Markets are messengers — sometimes of doom, at other times of glad tiding. Actions like restricting short-selling of financial stocks, Merkel’s bright idea in May, are pointless. They don’t change reality. Even intervention in the markets — such as the European Central Bank’s sovereign bond-buying programme, which restored calm late last week — only buys time.
Germany’s iron chancellor is also right that politicians can prevail, but only so long as they change what markets are worried about. The euro zone’s volatility is largely due to lack of clarity over whether the authorities have the will to tackle excessive debt loads and uncompetitive economies. Solutions are available, but there are multiple actors with competing visions.
Take the ECB first. Mere bond-buying won’t save the situation. But if the central bank was prepared to take big risks with its own balance sheet, or abandon its policy of not creating inflation, that would be a different matter. It could then hoover up a few trillion euros of debt and allow the money supply to expand commensurately by not “sterilising” the operation.