Spain to Challenge German Doctrine on ECB Funding Governments

Spain will this week revive peripheral euro nations’ aspiration to make the European Central Bank a permanent backstop for government finances, a proposal repeatedly rebuffed by the German officials who control the currency union’s purse strings.

“The ECB should assume the role of lender of last resort, like the Bank of England or the U.S. Federal Reserve,” according to a working paper the Spanish Foreign Ministry will present at a July 19-20 meeting in Palma de Mallorca. “It can contribute to the success of the euro-zone economic policy.”

Spanish Foreign Affairs Jose-Manuel Garcia-Margallo will spring the plan to open up access to the central bank’s 2.4 trillion-euro ($3.1 trillion) balance sheet at a gathering of colleagues from some 18 European countries including Germany’s Guido Westerwelle. The European Union’s founding treaty forbids the ECB from financing governments, a stipulation to which Germany demands strict adherence.

The Bundesbank said in May 2012 that the ECB shouldn’t be lender of last resort and that the unlimited purchasing of government bonds would breach the scope its founding treaty. It was the sole opponent of ECB Chairman Mario Draghi’s bond-buying program.

Garcia-Margallo’s pitch fleshes out a proposal his Prime Minister Mariano Rajoy floated in April to give the ECB the same powers as the world’s other main central banks. Germany’s Bundesbank is the ECB’s largest equity holder with a 18.8 percent stake, while Bank of Spain is the fifth with a 8.3 percent.

Next Steps

Giving the ECB a broader role is part of a list of proposals Spain will present outlining the next steps on the European Union political agenda, according to a preliminary version of the document seen by Bloomberg News.

Spain is proposing to turn the European Stability Mechanism into a European Monetary Fund, with power to resolve problems in the monetary union, the document said. Garcia-Margallo will also call for single-currency members to be able issue common debt, placing German taxpayers on the hook for his country’s borrowing.

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