By David Henry
They've done it before and they can do it again. The members of the European Central Bank's Governing Council have already broken a taboo by buying 187 billion euros ($254 billion) of bonds in a bid to keep a lid on government-debt yields. Council members Juergen Stark and Axel Weber -- both German -- announced their resignation in response to the ECB action, which started last year in an attempt to keep Greece from defaulting.
Extraordinary times require extraordinary measures and only a landmark action from the ECB can finally give financial markets the "bazooka'' they are looking for: a willingness on the part of the ECB to act as a lender of last resort for governments. This would clearly represent a second, and more important, crossing of the Rubicon for the Frankfurt-based guardian of the common currency. But even in Germany -- which has so far been vehemently opposed to such measures -- there are increasing signs of support for a renewed ECB mandate, which would probably require a change to its founding treaty, as the only option left to tame the bond-market bullies.
On Sunday, the newspaper Die Welt reported a growing disillusionment with the Bundesbank's refusal to bend the rulebook to allow the ECB to perform a similar function to that of the Federal Reserve in bailing out governments by printing money. "There is a lot of animosity directed at the Bundesbank,'' Martin Greive and Jan Hildebrand wrote. Bundesbank officials have won the nickname of "monetary-policy Taliban'' in ECB circles, they say, citing unidentified sources. Even former Bundesbank board member Hans Reckers has advised his erstwhile colleagues to adopt a less "textbook-like'' approach, Die Welt said.Peter Bofinger, an economic adviser to the German government, followed up with his own recommendations today at a conference in Frankfurt by calling on the ECB to set an upper limit for sovereign-bond yields: another way of saying the ECB has to stand behind government debt by printing money. "We are in an emergency situation,'' he said. "If worst comes to worst, the ECB has to act before the financial system fails.''
German memories of 1920s hyperinflation will have to give way to monetary pragmatism before the ECB can finally put a stop to the dangers of a euro breakup and the inevitable economic turmoil that would follow. The pitfalls of the printing press are well-known: inflation; loss of incentive for indebted countries to reform themselves; political interference; and potential damage to the ECB's balance sheet. But there are few choices left if the euro area is to remain intact.
(David Henry is a Bloomberg View editor.)
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