A month ago, Mario Draghi moved the goalposts by saying that it was within the ECB’s mandate to intervene in markets to eliminate so-called “convertibility risk”. He went on to imply that large-scale, possibly even open-ended, purchases of short-term government debt in the troubled economies could be justified in order to restore belief in the markets that the euro could never break up. On Thursday, we may get some details of these proposals.
In this blog, I would like to take a step back and ask whether the ECB really has the ability to eliminate convertibility risk in the long run. In many respects, the ECB is taking on the role which has previously been fulfilled by the IMF in financing balance of payments crises in fixed exchange rate systems, such as the Bretton Woods system. Sometimes the IMF was successful in preventing a currency devaluation (ie “eliminating convertibility risk”), and sometimes not. What does this comparison tell us about the prospects of success for the ECB? Read more