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Economic Research

Europe Needs a Circuit Breaker Now

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4:10:00 PM | Last Updated

The ECB’s primary objective is price stability. The lender of last resort function is not part of the ECB’s official remit with respect to individual financial institutions or sovereigns; rather, it is deferred to national central banks (and treasuries) via the Emergency Liquidity Assistance (ELA) program unless otherwise specified (i.e., constructive ambiguity). Rampant intrinsic contagion in the eurozone (EZ) sovereign bond market to the core countries highlights the need for an EZ-wide circuit breaker and lender of last resort for both sovereigns and pan-EU financial institutions. Even if legally defensible, the assumption of this role would be challenged on the grounds that it violates the spirit of the Maastricht Treaty by fostering inflation in the future and by engaging in indirect monetization of public debt in violation of the treaty’s no-bailout clause. Massive intervention is no panacea but would provide a window of opportunity to put programs on track and win back shattered confidence.

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