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There's nothing like the faint whiff of hope to trigger a directional shift in the shallow markets of summer. That happened Friday, after doubting analysts stopped blogging and tweeting long enough to actually analyze Thursday's critical meeting of the European Central Bank's brain trust and what ECB president Mario Draghi had to say later at his press conference.

The initial knee-jerk response was that the ECB, hamstrung by political and policy rifts, had chosen to stand on the sidelines while the bond markets drive the monetary union ever closer to the edge of the cliff. Sure, there was the promise of future intervention, but with a raft of conditions. Mr. Draghi's public vow a week earlier to do whatever it takes to defend the euro seemed like so much hot air; and the optimism stemming from those remarks quickly evaporated.

But as a handful of market watchers skilled at deciphering central bank-speak later noted, there was more good news there than first met the eye. Mr. Draghi, it seems, has put together an innovative strategy for renewed bond-market intervention (focused on lowering short-term borrowing rates for Spain and other fiscally challenged countries under attack) that could radically alter the bank's role in the crisis.

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Even some long-time skeptics were impressed. Mr. Draghi "did deliver some pretty serious net positives when it comes to signalling a definitive policy platform for the ECB in the weeks ahead," says Constantin Gurdgiev, adjunct professor of finance at Trinity College in Dublin. "Time will tell, but the latest scheme … might buy the euro area enough time … to work through September-October on a more permanent set of solutions."

Heck, what's another two months in a crisis that has been unspooling since 2010?

And here's the best news: The Bundesbank, which still insists the ECB should stick to fighting inflation and leave the crisis to the increasingly helpless politicians, lacks the political support to block it.

New Estonian central bank boss Ardo Hansson pointedly noted that his and everybody else's vote on the ECB's governing council counts the same as that of Bundesbank chief Jens Weidmann, and majority rules. Besides, reports out of Germany indicate that Chancellor Angela Merkel and her coalition partners are on board the bond-buying express, whether Mr. Weidmann likes it or not.

But as Mr. Hansson remarked, much remains to be negotiated. So anyone looking for an instant solution is bound to be disappointed.

Still, the central bank is the only player on the European stage capable of taking the heat out of the crisis in a hurry, even if it can't actually solve it. And the sooner it acts, the better for the fate of the monetary union, says Kurt Huebner, professor of European studies at the University of British Columbia.

His prognosis is for more of the current muddling through while the policy makers work on long-term political, fiscal and competitive issues – but likely without Greece remaining in the club. A Greek exit, in turn, would give Italy and Spain more bargaining clout. "If Greece is out, everything becomes about keeping Spain and Italy in," says Prof. Huebner, an expert on European integration issues.

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"The politicians understand they must move toward stronger political union, which means additional transfers of sovereignty and fiscal policy control. But this needs a lot of time. And the crisis needs more or less immediate action," he adds. "I would always stress that the ECB can only buy some more time. [But] it can take away the threat or the opportunity for financial markets to permanently hijack the process."

So far, market players are winning the game, because they have been able to exploit "inefficient and indecisive crisis management," Prof. Huebner says in a new paper on the crisis and its possible outcomes. "The longer this type of crisis management continues, the stronger the position of financial market actors. In this situation a revamped ECB could become a critical game-changer."

For that to happen, he argues, the only European institution capable of restoring trust and financial stability must be allowed to operate like the Federal Reserve and other major central banks, becoming a true lender of last resort with the credible deterrent of unlimited firepower.

Otherwise, markets can simply wait until the ECB reaches some self-imposed limit on intervention. Which is exactly what happened when the bank suspended its secondary-market purchases of Italian and Spanish debt in March.

"It is no longer possible to design a central bank in the way the Bundesbank looks at it," Prof. Huebner says. "If you want to avoid a breakdown of the euro, then the Bundesbank has to lose this battle."

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About the Author
Senior Economics Writer and Global Markets Columnist

Brian Milner is a senior economics writer and global markets columnist. In a long career at The Globe and Mail, he has covered diverse business beats, including international trade, the automotive industry, media, debt markets, banking and the business side of sports. More

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