From panic-driven austerity to symmetric macroeconomic policies in the eurozone

On 6 September 2012 the European Central Bank (ECB) announced its ‘Outright Monetary Transactions’ (OMT) programme, which promised to buy unlimited amounts of sovereign bonds during crises. It is interesting to quote Mario Draghi who justified the OMT programme as follows: "[Y]ou have large parts of the euro area in a bad equilibrium in which you may have self-fulfilling expectations that feed on themselves. […] So, there is a case for intervening […] to ‘break’ these expectations, which […] do not concern only the specific countries, but the euro area as a whole. And this would justify the intervention of the central bank". After long hesitation the ECB appears to have made the fateful, but correct, decision to become a lender of last resort, not only for banks but also for sovereigns, thereby re-establishing the stabilizing force needed to protect the system from market fears and panic that have destabilized the eurozone. The effect of this announcement was quite dramatic. It took away the fear factor that dominated the eurozone in 2012: the fear that the eurozone could collapse soon. By taking away this existential fear, the ECB made it possible for government bond spreads to decline dramatically. Thus the decision of the ECB was a game changer and put meat onto the bones of Mario Draghi's July 2012 promise to ‘do whatever it takes’ to save the euro. Will this new role for the ECB be sufficient to save the eurozone? The question is analyzed in this article in two steps: first, we look at the risks that have been created by austerity; and second, we ask what kind of macroeconomic policies would be most appropriate.