Why the ECB refuses to be a Lender of Last Resort
Paul De Grauwe 28 November 2011
The euro has a matter of weeks to save itself, with several institutions now preparing for its collapse. Given this, why does the ECB still refuse to bail out Europe’s heavily indebted countries? This column provides an explanation. It says that the ECB may well be behaving rationally but adds that such behaviour is also foolish – and dangerous.
A number of analysts are calling for the ECB to act as the lender of last resort in the Eurozone government bond market (see for example Wyplosz 2011 on this site). Up to now it has resisted. But why should the ECB refuse to take up the role of last-resort buyer?
Europe's nations and regions Global crisis
ECB, Eurozone crisis
The Greek revolt: Good news for Europe
Charles Wyplosz 04 November 2011
Greek Prime Minister Papandreou made a stand this week. Even though he was backed down, this column argues that he did the EZ a favour by providing an opportunity to change course. One way or another, a disorderly Greek default is in the cards with its attendant contagion. At that point a real solution is inevitable – one that requires EZ leaders and the ECB to play on the same side with credible rules for all.
The Greek revolt, even if short lived, is good news on the European crisis front – it might provoke the long-awaited policy turnaround that is necessary to end the Eurozone crisis. It may finally awaken EZ leaders to the futility of the path they’ve chosen. Cherry on the pie: the unexpected interest rate cut by the ECB signals the advent of a less dogmatic central bank in the face of an impending recession.
The Greeks have a point
Greek sovereignty has been trampled over again and again.
Europe's nations and regions Financial markets Politics and economics
ECB, default, Greece, Eurozone crisis, debt restructuring
European summits in ivory towers
Paul De Grauwe 26 October 2011
The Eurozone crisis plays on to a familiar tune. Finance ministers meet on the weekend only for markets to dismiss their efforts the following Monday. This column argues that Europe’s leaders have lost touch, that the ECB has the firepower but is not prepared to use it, and that the outcome of all this is depressingly clear: Defeat by the financial markets.
Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy.
EU institutions International finance Monetary policy
ECB, inflation targeting, Eurozone crisis, EFSF
Resolving the current European mess
Charles Wyplosz 25 October 2011
A series of policy mistakes have put Europe on the wrong path. This column says that the current plan to enlarge the EFSF and recapitalise banks through markets will fail. The twin crises linking sovereign debts and banking turmoil need to be addressed simultaneously for Europe to avoid economic disaster.
Editors' note: This column forms part of a VoxEU.org eBook 'The Future of Banking', to be published on Tuesday 25 October.
EU institutions EU policies International finance
ECB, eurozone, sovereign debt, EFSF
Capping interest rates to stop contagion in the Eurozone
Bernard Delbecque 17 October 2011
It is widely recognised that without a firewall around illiquid but solvent Eurozone countries, a loss of confidence in the markets could increase interest rates to levels high enough to make any country insolvent. The aim of this column is to propose a concrete plan to build such a firewall and halt the spread of contagion of the debt crisis to Italy and Spain.
A straightforward solution to stop contagion would be to appoint the ECB as a lender of last resort in the government bond markets (Wyplosz 2011a). By making it clear that it is fully committed to exert this function, the ECB would restore confidence in the markets.
EU institutions EU policies
ECB, contagion, Eurozone crisis, EFSF
A failsafe way to end the Eurozone crisis
Charles Wyplosz 26 September 2011
Last weekend, Eurozone policymakers were shaken into admitting that something more needs to be done to save the Eurozone and avoid a major crisis that would reverberate around the world. This column proposes a three-step solution to finally end the crisis.
The annual gathering of finance ministers and central bank governors at the IMF/World Bank meetings in Washington seems to have been an epiphany for Eurozone leaders. Finally, there seems to be agreement that their July 2011 agreement was insufficient (Reuters 2011).
In a previous Vox column, I sketched a way of stopping the public debt crisis that is engulfing the Eurozone (Wyplosz 2011). Here I develop this idea into a coherent proposal that, if adopted, would immediately stop the rot.
ECB, moral hazard, Eurozone crisis, EFSF, debt guarantee
The damaged ECB legitimacy
Anne Sibert 15 September 2011
The European Central Bank was once known for its focus on price stability. Since the global economic crisis, however, its role has extended to saving banks and sovereign countries. This column argues that such a move has badly harmed the institution’s legitimacy – something that will damage both its policy effectiveness and confidence in the governing bodies of the EU as a whole.
The ECB’s role has evolved in its decade-long existence. In this note I describe how the choices of the ECB have damaged the institution’s legitimacy. This matters because decreased legitimacy lowers the ECB’s future policy effectiveness and weakens the legitimacy of all other institutions of governance in the EU, including the European Commission, the European Court of Justice, and the European Parliament.
In evaluating the ECB’s performance, I split the last eight years into two parts:
EU policies Europe's nations and regions Global crisis Institutions and economics
ECB, transparency, Eurozone crisis
Why a slowdown in Germany could be good for Europe
Francesco Giavazzi, Alberto Alesina 01 September 2011
One major problem with the Eurozone as a currency area is that its economies are not in sync. With growth in Germany now slowing, this column argues that this could be the blessing the ECB has been praying for.
Paradoxically, the slowing down of the German economy could be a blessing for the euro – and a boost to the probability that the euro survives the crisis.
Until a few weeks ago, the Eurozone economies seemed to be moving in different directions.
- Germany was growing at a swift rate with a solid fiscal stance.
- The southern economies (Greece, Italy, Spain, and Portugal) were – and still are – not growing and in a fiscal mess.
This situation created headaches for the ECB.
EU policies Europe's nations and regions Monetary policy
Germany, ECB, Eurozone crisis
The European Central Bank as a lender of last resort
Paul De Grauwe 18 August 2011
With the Eurozone crisis casting doubt over the solvency of Spain and Italy, the ECB has once again intervened to provide liquidity in the government bond markets. This column asks the question: Is there such a role for the ECB as a lender of last resort?
In October 2008 the ECB discovered that there is more to central banking than price stability. This discovery occurred when it was forced to massively increase liquidity to save the banking system. The ECB did not hesitate to serve as lender of last resort to the banking system, despite fears of moral hazard, inflation, and the fiscal implications of its lending.
ECB, lender of last resort, Eurozone crisis