Wednesday, 16 November 2011

No lender of last resort for the Eurozone

Jens Weidmann, Bundesbank president, recently gave an interview to the Financial Times. Here is what he said about the role of the European Central Bank and whether it should start to fund the deficits of eurozone member states like Italy, Greece and Spain.

His answer was remarkably direct and honest, leaving little room for the argument that the ECB should come to the rescue of bankrupt Eurozone countries.

Financial Times: Can you explain why the ECB cannot be lender of last resort (for Eurozone governments)?

Jens Weidmann: The eurosystem is a lender of last resort – for solvent but illiquid banks. It must not be a lender of last resort for sovereigns because this would violate Article 123 of the EU treaty [prohibiting monetary financing – or central bank funding of governments]. I cannot see how you can ensure the stability of a monetary union by violating its legal provisions.

I think the prohibition of monetary financing is very important in ensuring the credibility and independence of the central bank, which allow us to deliver on our primary objective of price stability. This is a very fundamental issue. If we now overstep that mandate, we call into question our own independence.

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