Nouriel Roubini has criticized the European Central Bank for being a lender of last resort – a buyer for European bonds when interest rates become unsustainably high. However, politics is stopping the use of monetary policy, which could soften the economic blow to countries facing severe austerity measures. In a NY times piece today, a German member of the ECB’s governing cancel reiterated that “the increasing demand being placed on monetary policy is dangerous. . . Monetary policy cannot and may not solve the solvency problems of governments and banks.” German politics, however, will likely deny its use. Looser monetary policy could save Greece and Italy, but it would impose higher inflation on Germany, France, and other core countries. With Germany holding much of the influence in the ECB, monetary policy will likely not be used for that reason. Furthermore, do to a lack of fiscal integration, the ECB does not wish to use monetary policy, because it would incentivize member countries to avoid fiscal reform even more than EU membership already does (see my previous post). So, the ECB is focused on austerity measures before buying up suffering countries’ debts.
As Nouriel Roubini has noted, the austerity measures in their current form will inevitably lead to the peripheral countries absorbing all of the economic hardship, followed by disorderly Eurozone exit. Using a combination of mostly monetary policy and some fiscal reform would be ideal until a full integration can take place, but it seems to be politically untenable. Although the ECB champions political and fiscal integration, they simultaneously fight against it. Citizens of France, Germany and other core countries are not accepting of fiscal and political integration. These opposing forces are likely set to slowly tear the Eurozone union apart or at least foce the peripheral countries out of the union.