Samuel Johnson's droll remark – "when a man knows he is to be hanged in a fortnight, it concentrates his mind wonderfully" – could have applied to the euro zone before the European Central Bank (ECB) launched its save-Europe mission.
Between 2009 and mid-2012, European economies were unravelling at an alarming pace. Three of them – Greece, Ireland, Spain – were kept alive by international bailouts; a fourth, Spain, received a backdoor bailout in the form of a bank rescue. The governments of those countries went into panic mode. Banking systems were propped up and overhauled, budgets were cut with alacrity, market and labour reforms were put in place. The widespread strikes, demonstrations and riots from Athens to Barcelona were grim evidence of the pain suffered by everyone.
The minds of government and corporate leaders were focused. It was reform or die.
Then came Mario Draghi, president of the ECB. In the summer of 2012, the euro zone crisis was at its height and Greece seemed on the verge of bolting from the euro. Greece's exit (or Grexit, in the graceless argot of economists) could easily have triggered the copycat exits of the other bailed-out countries. And if they hit the road, Italy, the euro zone's third-largest economy, might not have been far behind. Arrivederci euro zone.
Mr. Draghi fixed the mess in July of that summer with one simple sentence. "The ECB is ready to do whatever it takes to preserve the euro," he told an audience in London, just before the start of the Olympic games. The effect was quick and compelling. Sovereign bond yields began to drop. Then they plummeted. The crisis was soon over and the ECB didn't have to spend a cent. All the ECB did was introduce, but not implement, a program that would have bought "unlimited" quantities of the bonds of any country struggling to finance itself. The bad news was that the minds of governments became wonderfully unfocused as bond yields (the cost of debt) dropped to pre-crisis levels. It was as if the hangman had untied the noose's knot.
In some countries, bond yields eventually reached 100-year lows. During the crisis, Italy was flogging debt at a painful and unsustainable 7 per cent, the same yield that ultimately shut Greece, Ireland and Portugal out of the debt markets. Today, Italy is selling 10-year bonds at 2.9 per cent, only slightly more expensive than British and American bonds. Spain's bonds are even cheaper. Greece and Portugal are back in the private debt markets even though their economies have barely improved from the crisis years.
Today, the vaunted euro zone "recovery" is not worthy of the name. Fresh data released this week put Italy back into recession, with back-to-back quarterly contractions. France is flat-lining and in danger of slipping back into recession, too. German industrial production is on the wane, suggesting that the country's second quarter will show no growth.
The International Monetary Fund predicted last month that the 28-country euro zone would grow by a mere 1.1 per cent this year. With Italy back in recession and disinflation threatening to turn into outright deflation – the euro zone's July inflation figure was only 0.4 per cent – all bets are off for an economic rebound that will create jobs and bring down crushing national debt levels. On Thursday, after the ECB's rate-setting meeting, Mr. Draghi said the recovery remained "weak, fragile and uneven."
What went wrong? To be fair to Mr. Draghi, the poor man has used every monthly policy meeting since 2012 as a platform to beg governments not to give up on austerity and economic reforms. It hasn't worked.
Take Italy, one of the industrialized world's least competitive economies. Italy has ground through four governments since the start of the financial crisis, each of which promised to overhaul the economy. None were successful and, with bond yields falling into money-for-nothing territory, the reform incentive is vanishing.
It comes as no surprise that the signature reform effort of Matteo Renzi, Italy's Prime Minister since February, was the overhaul of the Senate, not the labour markets and other components of the economy. His sole nod toward the economy was a tax reduction aimed at low-income earners that did nothing to stimulate spending and prevent the recession from galloping back. Under President François Hollande, France's reform effort is equally lame. His socialist government does not have the stomach to launch a determined market-liberalization campaign. With France's 10-year yields at 1.5 per cent – less than Canada's – why would it?
The euro zone is in trouble again. It cannot possibly thrive when France and Italy, two of its three anchor economies, are going nowhere and de-industrializing quickly; Italy's industrial output is down 25 per cent since the start of the crisis in 2008. Mr. Draghi can take part of the blame. He underestimated the impact on yields of his famous "whatever it takes" pledge. He rigged it so that the markets could not back his pleas for reform.
Mr. Draghi may regret using kindness to kill the crisis two years ago. His reward, it appears, will be long-term economic stagnation in the euro zone. Maybe he should have read this quip from American humorist Edgar Wilson Nye before making his save-Europe pledge: "Kind words will never die – neither will they buy groceries."
Eric Reguly