ECB 'stands between Europe and total disaster'

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Mario Draghi, welcome to your first day on the job. The fate of the world economy rests entirely in your hands. Now, what do you take in your coffee?

This is a loose imagining of the greeting Mr. Draghi might have received Tuesday morning as he officially took over as president of the European Central Bank. It probably didn't happen quite like this. As the former head of the Italian central bank, Mr. Draghi surely prefers espresso. And that bit about the fate of the world economy? That, unfortunately, isn't an exaggeration.

"The ECB is what stands between Europe and total disaster," Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace in Washington, said on a conference call Tuesday. "The ECB is probably the single most important institution in terms of assuring global economic stability going forward."

Mr. Draghi will get no time to settle into his job. He is scheduled to preside over a policy meeting on Thursday. That meeting already was highly anticipated. With markets in turmoil after the Greek government's decision Monday to hold a referendum on the European bailout, the meeting could be a seminal event. With the politicians consumed in chaos, the ECB alone can calm the storm.

But just because it can, doesn't mean it will.

Mr. Draghi is known for his caution, suggesting he will be reluctant to dramatically change course within days of taking the helm from Jean-Claude Trichet. Inflation is picking up in the euro zone, a significant barrier to action for a central bank that sees keeping a lid on prices as its sole responsibility. There already is significant institutional resistance to the ECB's decision to buy Italians and Spanish bonds. The ECB strongly resisted calls that its resources should be used to beef up Europe's financial rescue fund, forcing politicians to resort to more complicated options.

There are many who wish the ECB would act more like the U.S. Federal Reserve by stating unequivocally that it will act as the lender of last resort for the 17 countries that use the euro.

Adam Posen, a member of the Bank of England's policy committee, told a conference in New York last week that the "missing" element of Europe's efforts to contain its debt crisis is that the "ECB is not stepping up to work with the governments." Lost in the minutiae of bank recapitalizations, haircuts and leveraging the European Financial Stability Fund is that reducing the debts of the countries such as Greece, Portugal and Italy will ultimately require economic growth. "That will require activism from the ECB," Mr. Posen said.

Those who subscribe to Mr. Posen's view would have the ECB cut interest rates and perhaps even get into the quantitative easing game, as the Bank of England and the Fed have done.

But the calculations for Mr. Draghi aren't so simple. A declaration by the ECB to save the day would remove pressure on governments to change their ways. It's worth noting that besides buying the debt of stressed euro-zone countries, the ECB also is lending banks as much money as they need. Mr. Trichet took these steps reluctantly. But as Jacob Kirkegaard, a research fellow the Peterson Institute for International Economics, told a group of reporters in Washington on Monday, a blanket pre-commitment by the ECB is the same as agreeing to bailout Italy's controversial prime minister, Silvio Berlusconi.

Mr. Kirkegaard is more positive than negative on Europe's rescue plan. He argues that the idea of crating a special purpose investment vehicle to raise money for future bailouts will have little impact because too few people will be willing to commit money. But that's ok. The act of politicians attempting to do something could provide cover for the ECB to continue doing what it already is doing: acting as the lender of last resort.

"There is no other bazooka in Europe other than the ECB," Mr. Kirkegaard said.