One of the last remaining potential solutions to the Europe crisis–albeit a temporary one–is for the European Central Bank to aggressively intervene and start buying the sovereign debt of Europe’s weaker countries. If this intervention is big enough, it should reduce borrowing costs (interest rates) and thus allow the countries to finance their deficits for a while longer, until a more permanent solution to the Europe mess can be worked out.
The big reason the ECB has not aggressively intervened so far is Germany. The Germans are adamantly opposed to ECB intervention, for two reasons:
First, politically, an ECB bailout would be a disaster for German politicians. German voters are appalled by the idea that industrious Germans will be bailing out lazy Italians and Greeks, and they would likely vote accordingly.
Second, the Germans are terrified that huge ECB intervention will trigger massive inflation that will destroy the value of the Euro.
The latter fear is amplified by Germany’s experience during the Weimar Republic in the 1920s and 1930s, when the value of the mark was demolished. But if Europe is going to survive, Germans need to understand that central banks can radically expand their balance sheets and print money without it causing crazy inflation.
Specifically, what needs to happen in Europe is for the ECB to buy tons and tons of Italian (and Greek and Spanish) debt. And as recent history shows, in certain circumstances, central banks can do this without triggering hyper-inflation.
This chart shows how when the Fed embarked on quantitative easing (massive bond buying) in 2008 during the crisis, it didn’t cause inflation to boom.
Specifically, this chart compares the size of the Fed’s balance sheet (all the assets it bought) against the monthly change in the CPI (inflation)
This chart is from the St. Louis Federal Reserve, so any newspaper can publish it totally free of charge. Go! Do it!
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