Post 10_The ECB and the sovereign debt crisis

The European central bank is the central bank for the euro and  administers the monetary policy of the 17 EU member states which constitute the Eurozone. The primary objective of the European Central Bank is to maintain price stability within the Eurozone, which is the same as keeping inflation low and prevent deflation. On 9 May 2010, the 27 27 countries of the European union agreed, in order to have a new instrument to tackle the crisis, to a new pact which create the European Financial Stability Facility. The EFSF’s mandate is to safeguard financial stability in Europe by providing financial assistance to Eurozone Member States; the main instruments that it can use are: the providing of loans to countries in financial difficulties and to finance recapitalizations of financial institutions through loans to governments. In these days the president of the ECB, Mario Draghi, is under increasing pressure to abandon the bank's defined mandate to maintain price stability, and to instead become the Eurozone's lender of last resort; it prints more money to buy European states bond In order to reduce their sovereign debt. this has been considered, by some countries, as a panacea for their huge sovereign debts and as the best solution to sort out from this crisis, Germany and other countries instead  fear the central bank will trigger an inflationary spiral. And unconstrained monetizing of Spanish and Italian debt will ultimately prove to be inflationary if governments fail to stick to their austerity measures. In a recent interview, asked about the financing of Italian and Spanish sovereign debt ,Luc Coene, the Belgian bank governor said that  “It makes no sense for the ECB to start financing those countries, it would only lead to the ECB taking on the whole public debt of Spain and Italy onto its balance sheet, the conclusion is clear: When you take away the market pressure, you take away the pressure on politicians to act.” President Mario Draghi  reiterates a lot of times  that "the ECB cannot replace governments," and that countries would have to request assistance from the European Financial Stability Facility (EFSF) before the ECB could step in. Unfortunately, history shows that once market pressure is relaxed on governments, they tend to restart spending and increasing their debt again. At the moment austerity seems to be the only believable  instrument to tackle the sovereign debt crisis.

References:
http://www.huffingtonpost.com/sheldon-filger/european-central-bank-and_b_1106039.html
http://blogs.wsj.com/eurocrisis/2012/07/26/ecb-finds-a-way-to-buy-sovereign-debt/
http://www.telegraph.co.uk/finance/financialcrisis/9468862/Debt-crisis-ECB-buying-Spanish-and-Italian-debt-makes-no-sense-says-Belgian-bank-governor.html

Here's a funny short video that explain how the euro debt crisis was generated.