ECB, time is running out

With the first and second LTRO programs the ECB was able to buy precious time to allow the slower workings of politics to solve the problem structurally. Unfortunately, this placebo only worked until a Greek exit from the Euro became a likely outcome rather than a discussion theme for economists.

The excessively pro-cyclical policies imposed by the Germans and the EU on the weaker countries goes against all textbook economics, not only Keynesian. The results, deepening of recessions, deterioration of bank balance sheets, and the beginnings of social unrest, may end up provoking the opposite effects. If Greece leaves the Eurozone, it will be a signal to the markets that they should price in a Portuguese, Spanish, Italian, and who knows, maybe even French exit. That would of course mean the end of the euro.

As with all problems, the later you tackle them, the more aggressive you will need to be to hope to achieve success. Clearly the only body able to fight for the Eurozone survival is the ECB. Its next steps will have to include a strong signal, a double notch rate reduction, and a pragmatic relaxation of collateral rules. Lack of decisive action soon with these tools will only leave it the option of real QE, sometime in the summer months.