The Debt Crisis and the European Central Bank’s Role of Lender of Last Resort

While the media and some professional blogs propose austerity policies because the European debt crisis is due to the misuse of public finances by some national authorities, this paper suggests that the existence of national conflicts within the ECB’s governing bodies is the main cause of the crisis. By examining the interventions of the Eurosystem in favour of the Government sector, the paper argues that fiscal policies enhancing growth and reductions in the interest rates on sovereign securities are needed. This requires minimising moral hazard regarding the behaviour of the national political authorities. The literature on the institutional organization of policy coordination contains rich material for the identification of sensible solutions to this problem. Yet, the unfounded fears spread by the media among the taxpayers make it difficult to apply them.