Draghi plan is more make-do-and-mend With some considerable panache, Mario Draghi, president of the European Central Bank, has done it again. His new bond buying plan, with its implicit promise to bring unlimited firepower to bear on the sovereign debt crisis, has seemingly convinced the markets that he will indeed deliver on his July promise to do whatever it takes to save the euro. He has even wrapped it up in the language of monetary policy making to sidestep accusations of providing morally hazardous direct financing to governments. Undoubtedly this marks a watershed in the crisis. Whether it is quite the watershed that the markets perceive is another matter. Of course there is logic in having the ECB act as a de facto lender of last resort in the eurozone sovereign debt market. This is because unstable equilibria can arise in panicky markets based on the fact that there is always a rate of interest at which any country becomes insolvent. Markets can thus push solvent countries into self-fulfilling default. In the case of the eurozone the problem has been compounded by investors" fear of convertibility risk, especially in relation to Spain and Italy. That reflects the loss investors would incur if these countries were to leave the euro and redenominate their sovereign bonds in a new currency. Mr Draghi's bond buying programme seeks to address this problem. It has the advantage of being cheaper than propping up banks, whose collective liabilities tend to be greater than their national governments" outstanding debts. It also avoids the incest problem that arose from the ECB's earlier long term refinancing operations, whereby rickety banks used the money to increase their exposure to fiscally flaky governments. The big question is whether this new Draghi fix means that everything is now different, or whether the warm afterglow will fade as it has with previous initiatives. The case for scepticism rests on the fact that no one can be sure that Spain and Italy are solvent even after recent reductions in their cost of borrowing. Italy has shown nil growth for the past decade and remains fundamentally uncompetitive, with an inflexible labour market. Net public sector debt is more than 100 per cent of gross domestic product. Like the rest of southern Europe it is being forced to tighten fiscal policy pro-cyclically just as it goes back into a recession that will cause tax revenues to dwindle and more bad debts to pile up in an undercapitalised banking system. The debt arithmetic in a no growth environment with a 10-year government bond rate of just over 5 per cent is, to put it kindly, unforgiving. In essence, the ECB has solved a problem of market access for these countries and bought them more time. But does anyone believe that the successor to Italy's technocratic government will make good use of this breathing space? For in the end the question of solvency boils down to one of governmental competence in addressing these intractable problems. Much the same is true of Spain, even if the economic circumstances are in many respects different. To the extent that this does represent a watershed, it may have more to do with creditor perceptions than market perceptions. Until now the issue as to who might be best out of the eurozone has focused on Greece, Portugal, Spain, Italy and Ireland. Yet the new bond buying plan represents a potentially huge implicit transfer from northern European creditors to debtor countries. It comes on top of the already substantial explicit support provided through the existing rescue funds. The ECB, backed by the credit of a northern European bloc led by Germany, is once again weakening its balance sheet by increasing its exposure to credit risk. Little political effort has been expended on explaining to northern European taxpayers why there might be a case for such transfers. It may be that they will consider this a step too far and put no faith in the conditionality that is part of the Draghi bond buying plan. The forthcoming election in the Netherlands will cast interesting light on this. With rumblings of discontent in Finland, too, the debate about exit may henceforth turn on the peripheral countries of northern Europe, for whom leaving the monetary union might appear to provide a tempting way to avoid picking up the tab. That, in turn, could resonate with the German electorate, which has had to put up with remarkably little in the way of increased living standards since the abandonment of the D-Mark in 1999. As the German-induced fiscal permafrost descends on southern Europe, undermining the capacity to address the overwhelming debt overhang, this bond buying plan will look like yet more make-do-and-mend. Markets usually wake up in the end. Maybe creditors will too. The writer is an FT columnist