Draghi's risky game

Mario Draghi takes the gloves off. A little more than two years ago, he announced that the ECB will do anything to save the euro. Those words were enough at the time to tame financial market speculation against Europe's single currency.

The announcement also eased worries about some of the eurozone's problem children such as Portugal, Spain and Greece. The bloc's economic growth, however, hasn't picked up as hoped. Fears of a deflationary spiral have augmented, and Europe's biggest economy, Germany, has run out of steam, while France and Italy do far too little to reform their economies.

Europe's monetary authorities, therefore, had to act. ECB President Mario Draghi has so far excelled primarily in making announcements. He cut interest rates close to zero percent, thus shooting off the most important weapon in his arsenal. That move, however, has failed to shope up the eurozone's fragile recovery.

Furthermore, the decision to impose a penalty rate on banks for parking their liquidity with the ECB instead of lending it as credit to companies fizzled out. Against this backdrop, the new rate cut is only symbolic and won't change the eurozone's economic trajectory. Quite the contrary, it exacerbates the risks to savers, who want meaningful returns on their savings, but will continue to feel they are being robbed of their private assets.

Then, a few weeks ago, Draghi broke the final taboo, publicly condoning a weaker euro. Central bankers normally are reluctant to converse about exchange rates.

But what's normal in times of crisis, and as the euro has weakened against the US dollar it has helped the eurozone's ailing economies to sell their goods cheaper on world markets. This alone, however, won't be enough for the eurozone to regain competitiveness and economic growth.

The ECB President, therefore, is now forced to launch the next phase of monetary efforts - a program of central bank purchases of asset-backed securities and covered bonds. This move is expected to restart generous credit lending by banks, the risks associated with it are, however, shifted to the central bank. The program, as has transpired, could amount to 500 billion euros over three years.

Nevertheless, the problem in such bundled transactions is that the risks can be wonderfully packaged. They were one of the triggers of the 2007-08 financial crisis, which caused the great recession. These packages have a reputation of exacerbating economic crises and regulators, therefore, have to examine very closely what assets are being packed.

What we are currently seeing is the ECB's last gasp to bring Europe out of its economic paralysis. The eurozone's monetary authority has only one lever remaining at their disposal. It is the hotly debated large scale purchases of government bonds, which effectively means financing governments by printing new money.

We are not at that stage yet. But the currency area's political leaders have to understand at least now that the ECB is no longer in a position to play the role of firefighter. Structural reforms are immediately needed, particularly in the bigger economies such as France and Italy. The ECB has bought politicians some time, but the ball is now in their courts.