One possible form of that action is an expanded purchase program of troubled Italian and Spanish bonds. It could be combined with a banking licence for the European Stability Mechanism, which would greatly expand that fund’s ability to buy sovereign debt.
“…focusing potential ECB purchases on the sovereign debt of those countries with high interest rates would have serious adverse effects. It would reduce pressure on the governments of Italy, Spain, and other high-interest countries to make the politically difficult decisions that are needed to cut long-term fiscal deficits. Spain needs to exercise greater control over its regional governments’ budgets, while Italy needs to shrink the size of its public sector. An ECB policy that artificially reduces their sovereign borrowing costs would make these steps even more politically difficult.”
Feldstein makes an interesting point that the ECB could be forced to judge whether a country has reformed enough to justify continued support, making them an arbiter of fiscal policy in addition to monetary policy.
As an alternative, Feldstein suggests that the ECB purchase a “neutral basket” of bonds, with the share from each country determined by ECB capital. Such a program would be closer to the QE we see from the Federal Reserve and Bank of England, and less politically fraught.
Read the full column at Project Syndicate
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