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This whole debate about whether or not the European Central Bank should be more involved in bailing out Europe has been dominating headlines.But although this debate is earning a lot of air-time, the reasons the ECB is not so keen on this plan have not changed.
Here’s a quick pro-con of what’s at stake:
PRO: The ECB should play a bigger role in the bailout: The markets and France are clamoring for the European Central Bank to assume a much larger role in stemming the eurozone crisis. While this would probably require the bank to print a boatload of money, the euro area economy is so big that it probably would not cause the hyperinflation Germany so dreads. Purchasing bonds and acting as the lender of last resort for regions and banks are typical behaviours of central banks across the globe, and there’s no reason the ECB shouldn’t take on that role.
There are two avenues to increase ECB involvement: either it can dramatically increase purchases of sovereign bonds (directly or indirectly), or EU leaders can agree to give the European Financial Stability Facility a banking licence which would allow it to borrow massive sums from the ECB.
CON: The ECB should NOT play a bigger role in the bailout: Germany and the ECB argue that stronger intervention in the bailout is illegal based on the current treaties. Germany strongly opposes using the printing presses to bail out peripheral Europe, not only because of its experiences with hyperinflation in the 1930s.
There are practical reasons to for this viewpoint. Analysts argue that high borrowing costs are making PIIGS governments move quickly towards austerity, and once borrowing costs go down they might try to get out of this deal. Stronger intervention also sets precedent for sovereign bailouts that could encourage moral hazard among individual states without stronger regulation (i.e. control over taxes or government spending). That regulation—though perhaps forthcoming in the future—would limit the sovereignty of national governments, and so would be difficult to see to fruition.
Finally, the ECB is worried that it will lose its independence if it takes on a bigger political role.
Clearly, there are lots of good reasons for the ECB not to take a bigger role in fixing the crisis. That is why German Chancellor Angela Merkel and ECB President Mario Draghi have been so vehement about treaty changes, and that’s not—at heart—such a bad idea.
The problem is that making such changes is incredibly time-consuming, and the ECB could probably get away with doing more if it has to. To that end, providing the EFSF—a temporary institution—with a banking licence could be the best option that might not expand the ECB’s role permanently. However, such a move would not fix the underlying problem of the eurozone—a lack of fiscal integration.
At the end of the day, it’s hard to see the ECB not taking a bigger role to save the euro because there aren’t really any other viable options at this point.
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