Amid the head-scratching over how best to solve the eurozone's crippling sovereign debt crisis, one solution is being increasingly championed by an influential cast of economists: to allow the European Central Bank (ECB) to become a “lender of last resort.”
This, say the Nobel prize winner Paul Krugman and other big guns, will defuse a liquidity time bomb by guaranteeing that cash will always be available to pay out bondholders of government debt. They argue that absence of such a safety net is why the financial crisis has proved so virulent in the euro area.
Opposition by Germany
But despite the consensus forming among the economic elite in think tanks and newspaper op-ed pages around the world, there is fierce opposition in Germany to any plan which would appear to give the ECB a licence to print as much money as it pleases.
At his debut press conference as ECB head in Frankfurt last week, Mario Draghi insisted the “lender of last resort” option was not on the table because it was not in the ECB's remit. That, he said, was simply to ensure price stability in the medium-term.
It's a stance which goes down well in inflation-averse Germany. Germany's biggest selling tabloid, Bild , considers Draghi such a kindred spirit it praised his “Prussian-ness” and mocked up a picture of the Italian wearing a Kaiser Bill-style spiky helmet. Officials say it's not allowed under the Maastricht treaty so refuse to discuss it. But Hans-Werner Sinn, professor of economics and president of the Ifo Institute for Economic Research at the University of Munich, said German opposition to the idea was quite simple: “Because it leads to inflation. We know this from our own history. It's what Germany did until 1923.” It's popular argument in a country with a heightened awareness of its own history.
All German schoolchildren read textbooks showing grim-faced housewives in the 1920s trundling wheelbarrows of cash to the bakery in order to buy a million-mark loaf. They have it drummed into them that the hyperinflation of the Weimar republic was a key reason for the Nazi party's rise to power.
Sebastian Dullien, professor of international economics at HTW Berlin, the University of Applied Sciences, said German fiscal policy was not just shaped by history but also an overriding German ideology. “Germany's economic elite are very detached from what other economists throughout the world are thinking,” he said. “They believe that if you print a little more money in order to buy Italian bonds, that leads to inflation.” On the other side of the fence, the French President, Nicolas Sarkozy, is one of the highest profile cheerleaders for increasing the ECB's firepower. This enthusiasm, said Sinn, exists because France has never experienced hyperinflation. — © Guardian Newspapers Limited, 2011
