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More and more expert reports are seeing a new EU endgame: large-scale involvement of the European Central Bank.Citi’s Willem Buiter and the Centre for European Policy Studies’ Daniel Gros have both come out saying that only the ECB has the power to stave off the rapid “breakdown of the European financial system.”
Essentially, they both agree that the current European Financial Stability Facility — as well as the EU’s other fiscal institutions — simply don’t have the firepower to contain the EU’s burgeoning sovereign debt issues. However, the ECB has access to virtually unlimited re-financing and the ability to take on unparalleled risk. Ultimately, the EU will choose stability over crisis and acquiesce to a larger and stronger ECB.
Interestingly enough, Gros seems to think an expansion of ECB powers spells a terrible (but necessary) evil for the euro zone, while Citi’s Buiter thinks it should help you sleep at night.
“Europe never does things neatly, it seldom gets ahead of the curve and often only does the right thing when all else has been tried and failed. But it has considerable skills at lurching from crisis to crisis. This sovereign and banking crisis is likely to result in a stronger EU and Euro area.”
Buiter adds that political dissent — including Dutch desire to kick the Greeks off the euro — will not be enough to derail bailouts in the periphery. The EU constitution will permit a minimum of 9 members to cooperate without unanimous involvement to back an enlarged financial facility capable of backing struggling sovereigns, so long as Germany joins the party.
Buiter writes, “Germany is, despite the often fierce rhetoric, not about to destroy the Euro area and the EU.”