Monday, 21 November 2011

Will the ECB print?

Many analysts think that the way to solve the euro area's debt problem is for the European Central Bank to buy up the sovereign debt of distressed countries. For example, Steve Liesman wrote last week:

Like a good horror movie, accepting the possibility for the Euro disaster to be averted at this point requires a healthy suspension of disbelief. In fact, so much disbelief must be suspended that it would make the Exorcist seem like a documentary.

The fix, of course, is for the European Central Bank to print money and monetize the debt.

He is not sure that this will happen though.

You can only believe in this ending to the story if you ignore the issue that it may be illegal. The treaties governing the creation and operation of the ECB say it is not supposed to buy sovereign bonds or do anything not in furtherance of its mandate, which is price stability...

However, John Hussman thinks that not only is it unlikely to happen, it might not even solve the problem.

Over the past week, we've heard all sorts of propositions that the European Central Bank (ECB) "must" begin printing money to bail out Italy and other countries, because "there is no other option." There are three basic difficulties with this idea. The first is that ECB buying might help to address immediate liquidity issues of distressed European countries, but it would not address long-term solvency issues, and would in fact make them worse. The second is that the ECB, under existing European treaties, has no such authority, and the prohibitions against it are very explicit. Changing that would be far more difficult than many market participants seem to believe, because it would require an explicit and unanimous change in the EU Treaties that AAA rated countries such as Germany and Finland vehemently oppose. The third difficulty is that even if the ECB was to buy the debt of distressed European countries with printed money, the inflationary effects would likely be far more swift than anything we've seen in the United States. This would not "save" the euro, but would simply destroy it by other means.

Meanwhile, as Europe's debt crisis drags on, yet another government has fallen. From Reuters:

Spain's center-right opposition stormed to a crushing election victory on Sunday as voters punished the outgoing Socialist government for the worst economic crisis in generations.

The People's Party, led by former Interior Minister Mariano Rajoy, won an absolute majority in parliament and is expected to push through drastic measures to try to prevent Spain being sucked deeper into a debt storm threatening the whole euro zone.

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