Cost of Inaction – The ECB Edition

Taking aim at the inaction of the European Central Bank in this whole mess, The New Yorker’s James Surowiecki follows a similar line of reason to our earlier posts on the inaction of Merkel and the Southern economies, citing a clear and effective solution and an unwillingness to go there for fear of rewarding bad behavior:

The frustrating thing about all this is that there is a ready-made solution. If the European Central Bank were to commit publicly to backstopping Italian and Spanish debt, by buying as many of their bonds as needed, the worries about default would recede and interest rates would fall.

He continues with a swipe at the reasoning behind their choice of action – or inaction:
So the problem is not that the E.C.B. can’t act but that it won’t. The obstacles are ideological and, you might say, psychological…… Moral hazard is a reasonable concern, but the Germans have reaped enormous benefits from the euro—most notably, it made their exports cheaper for the rest of the continent—and they should be willing to bear some of the costs.
What I feel Surowiecki fails to mention is the pressure Merkel and Co. have put on the ECB to keep their coffers shut. Several times over the last few weeks, the ECB has broached the subject of extensive plans but have been curtailed by sharp responses out of Berlin and Paris. Their inaction seems less to do with their own ideological or psychological reasoning and more to do with falling in line with those at the helm. Still, the wave is coming whether they act or not; its up to them how prepared they will be.
Photo: AFP/Getty Images, via The Guardian
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