"It was not a decision. It was guidance."
So said European Central Bank President Mario Draghi last week as he addressed a reporter's question on what the ECB's governing council had just decided -- er, guided -- regarding purchases of euro-zone governments' bonds. While the construction sounds awkward -- how, after all, does a committee of policy makers devise a new policy without actually deciding anything? -- we cannot blame the grammatical contortionism on the Italian's otherwise excellent command of English. Rather, it reflected the extreme, hairsplitting lengths to which he must go to appease competing constituents as he seeks to save the euro and, by extension, the ECB itself.
History may well look on Mario Draghi's Aug. 2 press conference as one of the great masterstrokes of international politicking. On the other hand, it could go down as yet another awkward attempt to satisfy everybody that achieved nothing. Either way, it's clear that the ECB chief is no political lightweight, as some who'd interpreted his failure to deliver a "bazooka" of market-juicing measures wrongly concluded in the immediate aftermath of the press conference.
Mr. Draghi knows that the all-powerful German contingent at the ECB, represented by the Weimar Republic-haunted Bundesbank, is consumed by an almost sacred vow to protect the central bank's independence. Anything that smacks of monetizing the debts of profligate governments, and thus separates the ECB from its monetary policy mandate to insert it into the distasteful business of fiscal policy, will draw a firm "nein" from the Germans. But Mr. Draghi also knows that the struggling governments of the euro-zone's periphery, including his own in Rome, will suffocate if the vicious cycle of rising bond yields, plunging market confidence, and shrinking economic activity continues. The end game in that cycle is the collapse of the euro. What good would ECB independence do then?
So Mr. Draghi had to walk a thin line Thursday. He offered a compromise: the ECB would consider purchasing sovereign bonds of up two years' duration (rather than a carte blanche commitment to buy longer maturities), and only after government borrowers submit to new fiscal and structural reforms under aid packages from either the European Financial Stability Facility or the European Stability Mechanism. He gave the Italian and Spanish governments a bone while assuring the Germans the peripheral countries would be made to pay for it.
Eventually, markets judged this as a deft move. After the initial disappointment, when investors whined about the lack of a blank check for unlimited bond buying, both the euro and European bond markets rallied. Goldman Sachs, Deutsche Bank and UBS were so excited that they raised their medium-term forecasts for the euro into the $1.30 range from its current level near $1.2340.
Their optimism contains some logic. With Mr. Draghi's maneuver, the ECB's short-end bond purchases would buy Spain and Italy time. But by refusing to relieve their governments of their high 10-year borrowing costs, it would also keep the pressure on them to take actions that give investors enough confidence to lend for longer periods and get them off the treadmill of perpetual debt rollovers. Whether that works or not, the ECB chief can make the case to the hawks that he isn't monetizing government debt. It also shifts responsibility for action over to the politicians. The Spanish and Italian governments must choose to accept conditional aid from the EFSF and ESM while those of Germany, France and others whose credit backstops the two bailout funds must decide to give it to them. That's precisely how the ECB wants the crisis solved: a fiscal fix from governments, the monetary component handled by the central bank.
But this elegant political solution simultaneously highlights the main threat to its success: What's to say that all the parties involved find the political will to move forward? While the carrot of short-end bond buying might tempt the desperate Spanish and Italian governments to ask for European Union assistance, their long-suffering voters will resist the added austerity that will come with them. Neither will bailout-weary Germans, French, Dutch and Finns be happy. By taking Spain and Italy out of the pool of contributors to the EFSF and ESM, the proportional burden borne by those remaining will grow by amounts larger than the aid disbursements themselves.
And then there's the ECB's own internal struggle. One reason, perhaps, why Mr. Draghi didn't deem the ECB's announcement a "decision" is because even though he had agreement from all other governing council members, Bundesbank President Jens Weidmann dissented. That could be because Mr. Draghi, knowing he would also have to sell the idea to markets, promised the ECB would address concerns about seniority. Translation: In the event of a default, the ECB would not enjoy priority over private bondholders. That assurance should avoid the perverse effect of a bond-buying program scaring away investors who don't want to be subordinated. But it would also put the ECB's balance sheet at direct risk, something that no central banker can feel comfortable with, let alone a member of the hyperconservative Bundesbank.
Mr. Draghi has played a clever hand. But Europe's existential problems are far from being resolved.—Michael Casey is managing editor for the Americas at DJ FX Trader, a foreign-exchange news service from Dow Jones Newswires and The Wall Street Journal. His new book on the global financial system, "The Unfair Trade," was published in May. Write to Michael Casey at Michael.J.Casey@dowjones.com.