Will the ECB's Loans Be Enough to Save Europe?

Wednesday, the European Central Bank loaned the European banks 529 billion euros. It is the second long-term refinancing option (LTRO) the ECB has offered in the last few months, following a previous LTRO in December that saw 489 billion euros lent out. LTROs are just one of several possible open market refinancing operations the ECB can adopt and is characterized by the longest window for repayment - in this case, three years. The rate of the loan is fixed at 1%, with interest rates being one of the primary instruments the ECB uses to implement its monetary policy. This time, the injection of liquidity is supposed to help refinance businesses and other aspects of the economy, allowing for a faster recovery in consumption and investment and thus fostering economic growth. In December, the purpose of the loans seemed to be exclusively to fix the balance sheets of banks and allow them to buy government bonds at high - and therefore, convenient - interest rates, with the excuse being to reduce spreads on bonds of countries with trouble economies. Only 4.5% of the resulting liquidity was actually converged on the market. The problem of the "credit crunch", with banks closing the credit taps to businesses, was therefore not avoided. The ECB, in its role as lender of last resort to credit institutions, is trying its best to fulfill its role, despite the constraints imposed by a broader European political system obsessed with inflation control. Although some analysts have compared LTROs to quantitative easing, with its policies the ECB does not create money. Consequently, there are no real inflation risks. It will be really curious to see if the strategy of the euro zone countries is able to produce economic growth or at least slow a potential recession, an objective that politicians appear to have delegated to the ECB as they seek to avoid austerity measures. Hopefully, the operations of the ECB will succeed. Meanwhile, however, in the United Kingdom the latest economic reports all but confirm that the country will avoid a recession and the US GDP, in the 4Q 2011, was up 3%. Both countries have adopted very different monetary policies than the ECB and Mario Draghi. The questions remains: Which way is the right way?