Germany angles to become eurozone’s lender of last resort

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Germany angles to become eurozone’s lender of last resort
Published: November 5 2010 02:40 | Last updated: November 5 2010 02:40

From Prof Gabriele Pastrello.

Sir, Joan Robinson, a prominent economist of the past century, in reference to Voltaire said it should have been easy to kill a flock of sheep by means of an exorcism, if in the meantime you had poisoned the wells. The rescue from the sovereign debt crisis in the past spring has something in common with that.

Indeed, the creation of a European rescue fund at the time was nothing more than a signal to the world financial markets that eventually, after many utterances in the negative, the European Union – but, above all, Germany – intended to intervene. However, the real weapon used to fight the crisis was a window opened by the European Central Bank to buy government bonds.

An exceptional behaviour, allowed only by a stretching of the very tight rules of the statute of the ECB and of the Maastricht treaty, which strictly forbid the financing of budget deficits of the member states.

Now Germany is trying to enforce new rules in the treaty, the outcome of which should be the transformation of other EU member states into German regions, lest Berlin should not be willing to rescue them from a supposedly impending default.

In fact the threat is based on the commonly accepted view that the rescue from a default depends solely from the means given to a safety fund, and from the willingness, above all, of Germany, the main financing body, to use them.

Hence, the EU will not have, or is not willing to have, a “lender of last resort” in the shape of a proper central bank, and will have it in the shape of a state, Germany; which brings us rather towards the ancien régime.

I wonder whether Walter Bagehot could have agreed to such an arrangement?

Gabriele Pastrello,

University of Trieste, Italy
.