Peter Bofinger, an economic adviser to German Chancellor Angela Merkel, said it would be within the European Central Bank’s price-stability mandate to cap yields on euro-area sovereign bonds.
“If the ECB stabilizes the value of government bonds, it prevents an implosion of values,” Bofinger said in an interview in Frankfurt today. “If the ECB acts like this, it prevents deflation. It is completely within its mandate to maintain price stability.”
ECB policy makers have so far refused to fully backstop the bonds of countries including Italy and Spain as investors dump the assets amid the sovereign debt crisis. While the central bank is intervening in debt markets, it is resisting calls for large-scale purchases. German officials in particular say that amounts to printing money to bail out governments, which is prohibited by the ECB’s founding treaty and may damage its credibility.
“The situation now is similar to that in the autumn of 2008, when governments decided to guarantee the deposits of banks and then set new rules,” Bofinger said, adding the sooner the ECB acts “the better.”
“The Fed has bought $800 billion of treasuries in the past 12 months,” Bofinger said. “The Bank of England has announced another quantitative easing plan, the Bank of Japan are doing it. What’s the problem?”